Michael Gray, CPA’s Option Alert #82

An irregular alert for issues relating to employee stock options

July 2, 2010
© 2010 by Michael Gray, CPA
ISSN 1931-2768

(If you find this information valuable, please pass it on to a colleague!)

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Happy 4th of July!

This Sunday is Independence Day. It’s a great time to reflect on the principles our country was founded on. To me, these include limited government, self reliance and freedom of expression and action. These are challenging ideals to preserve.

Have a happy and safe holiday.

Our office will be closed on Monday, July 5.

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The year is half over!

Kind of sneaked up on you, didn’t it? Is it time to redouble your efforts to meet your goals for this year? How can we help?

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Michael and Janet Gray’s vacation schedule.

Janet and I are headed to Washington state for a family-oriented vacation. I’ll be out of the office from July 19 through 23. If you need help during that time, call Thi Nguyen, CPA at 408-918-3163.

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Do you need help with finishing extended income tax returns, preparing amended income tax returns, or tax audits?

Now that April 15 has passed, it’s time to focus on finishing extended income tax returns. Some of our readers have found errors in or are uncomfortable with tax returns that they prepared using tax software or were prepared by other tax return preparation companies. We can provide a second opinion. Others have received notices for tax audits and sometimes can’t get the help they need from their tax return preparer. We can help with all of these. To make an appointment, call Dawn Siemer Mondays, Wednesdays or Fridays at 408-918-3162 from 9 a.m. to 5:00 p.m. Pacific Time.

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Silicon Valley Tax Professionals Save The Date!

Michael Gray, CPA will be giving a seminar on Thursday, July 15, Post Mortem Planning, for the Estate and Trust Interest Group of the San Jose Silicon Valley CPAs. The seminar will be a luncheon meeting at Abbott, Stringhan and Lynch in San Jose from noon to 1:30 p.m.

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See David Lazarony’s art online and in person.

David Lazarony, who is one of our clients, is an accomplished painter. His art is being displayed in a show at the Pacific Grove Art Center Wednesdays through Sundays from June 4 to July 15, 2010. The name of the show is Experience Being Seen. David has posted the details and an online gallery of his art at www.DavidLazarony.com. Check it out! (Caution-Some of the paintings are of nude subjects.)

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Tax extenders bill dies in the Senate.

The Republicans blocked tax extender legislation included in an unemployment extender bill with a filibuster in the Senate. This is one of the most difficult tax planning years in recent memory because the Bush tax cuts expire after 2010.

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Corporate directors in Washington State are subject to B & O tax.

When states like Washington have no income tax, we tend to dismiss them when individuals have income in those states. Sometimes we are surprised to learn other taxes may apply. With the economic crunch, states are searching for revenue.

For example, the Washington State Department of Revenue issued a notice on June 22, 2010 that Washington’s Business and Occupation (B&O) Tax applies to compensation received, in any form, for services rendered as a corporate director. A corporate director acting in that capacity is not considered to be an employee.

The B & O Tax applies to corporate director’s fees effective July 1, 2010, based on Second Engrossed Substitute Senate Bill 6143, Part VII.

The following items are director fees subject to B & O tax:

  • All compensation received, in any form, for services rendered as a corporate director including, but not limited to, fees, the value of stock options or property received in exchange for services, awards and bonus; and
  • All amounts recovered for expenses incurred in connection with such services including, but not limited to, telephone costs, preparation fees for meetings and travel expenses.

The announcement refers to IRS Form 1099-MISC as a source document for the fees. Therefore, income from non-qualified stock options will be based on the date of exercise reported on Form 1099-MISC rather than the value on the grant date used for financial reporting. Compensatory stock options granted before July 1, 2010 are grandfathered and not subject to the B & O tax.

An individual is subject to the Washington B & O tax if he or she has a substantial nexus with the state. Nexus applies if the director is:

  • A resident or domiciliary of Washington; or
  • A nonresident that in a tax year has:
  • More than $50,000 of property in Washington;
  • More than $50,000 of payroll in Washington;
  • More than $250,000 of receipts in Washington; or
  • At least 25% of his or her total property, total payroll or total receipts in Washington.

Corporate directors who are taxable on their director fees in Washington and another state may be entitled to report their taxable income for B & O tax purposes on an apportioned basis.

A corporation may optionally agree to report the B & O tax for its directors.

For more information, visit the web site for the Washington Department of Revenue, www.dor.wa.gov.

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Georgia taxes nonresidents with Georgia source employee stock options income.

Georgia has enacted legislation that defines a “taxable nonresident” to include an individual who is not a resident of Georgia, who (1) regularly engaged in activity for financial gain or profit within Georgia in a prior year; (2) received income from such activity in the form of deferred compensation or income from the exercise of stock options; and (3) whose income exceeded the lesser of 5% of the income received in all places during the taxable year or $5,000.

(H.B. 1198, Laws 2010, effective January 1, 2011, applying for tax years beginning on or after January 1, 2011.)

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Financial Insider Weekly broadcast schedule for July and August.

Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 4:30 p.m., Pacific Time. Starting August 17, the broadcast time will change to 7 p.m. You can watch it on Comcast channel 15 for those cities. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for July and August:

July 7, Attorney Scott Haislett, “1031 exchanges of real estate”
July 14, Attorney Scott Haislett, “Sale of a principal residence”
July 21, Attorney Naomi Comfort of Hawks & Comfort, LLP, “Special needs trusts”
July 28, Peggy Martin, ChFC of The Family Wealth Consulting Group, “The role of life insurance in your estate and financial planning”
August 4, Geraldine Barry, President of San Jose Real Estate Investors Association, “How I got started investing in real estate”
August 11, Professor Patricia Cain of Santa Clara University, School of Law, “Recent developments for federal taxation of California registered domestic partners”
August 18 Scott Haislet, Attorney and CPA, “California Short Sales and Foreclosures”
August 25 To be announced

Financial Insider Weekly is also broadcast as follows:

  • Sunday at 5 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
  • Thursday at 5:30 p.m. on Comcast channel 27 in Santa Cruz County and Charter Communications channel 73 in Capitola and Watsonville
  • Thursday at 7 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
  • Thursday at 10 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Friday at 4 p.m. on cable channel 15 in Cupertino, Los Altos and Mountain View
  • Friday at 4:30 p.m. on Comcast channel 15 in Los Gatos
  • Friday at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco with online streaming video at www.bavc.org, “public access TV”.

Past episodes of Financial Insider Weekly are posted on YouTube. One way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on “Past Episodes.”

Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.

Hope you can watch or record the show. Please tell your friends about it!

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Questions and Answers

Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter.

Question

I worked in a subsidiary of my current company in China and got some stock options. Then I relocated to the USA and sold the option. Do I need to pay the tax for the trading income? Is the sale taxable in China?

Answer

As a resident of the United States, you are taxable on your worldwide income, including the income from exercising your stock option and selling the stock. There are some exceptions for temporary residents from China.

I don’t know about Chinese tax laws. The United States and China have a treaty to avoid double-taxation of income. You can find some information about the treaty in Publication 901 at www.irs.gov.

If the same income is subject to both U.S. tax and Chinese tax, you could be eligible for a foreign tax credit.

Call me at 408-918-3161 if you want a referral to a tax advisor who specializes in international tax issues.


Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter.

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Follow me on Twitter, Facebook or LinkedIn!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

I’m also on Facebook and Linked In. You can also follow me on other social media sites, www.facebook.com and www.linkedin.com/in/michaelgraycpa.

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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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Do you know about our other newsletters?

For general tax developments, tax planning ideas, business development ideas and book reviews, subscribe to Michael Gray, CPA’s Tax & Business Insight.

We are now offering our real estate tax newsletter, Michael Gray, CPA’s Real Estate Tax Letter, free of charge. Like this newsletter, we will talk about new developments, have reports on special tax concerns, and answer questions and answers. To subscribe and read a sample issue, visit realestatetaxletter.com.

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IRS Circular 230 Disclosure:

As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

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Consult with a tax advisor

For our readers who aren’t tax advisors, this newsletter is intended to alert you about tax issues that could affect you. It is not a substitute for advice from a professional tax advisor. You will find that getting advice from a qualified advisor is a worthwhile investment.

Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.

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Subscribe to Michael Gray, CPA’s Option Alert!

To receive the next issue of Michael Gray, CPA’s Option Alert with more employee stock option tax developments and answers to questions from our readers automatically via email, subscribe by filling out the form below.

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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)

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