Michael Gray, CPA’s Option Alert #85

An irregular alert for issues relating to employee stock options

October 15, 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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Boo! The year is almost over! Time for year-end planning.

Hot on the heels of Halloween are Thanksgiving and the holiday season. When we traveled to Ireland and Scotland, Christmas displays were erected right after Halloween because they don’t celebrate Thanksgiving when we do.

I hope you’re having a good year. We know many are not, so give generously if you are doing well.

With the final extended due date for 2009, October 15, behind us, it’s time for year-end planning. This is going to be one of the most difficult years for year-end planning in my 36 years in public accounting, because the Bush tax cuts are expiring at the end of 2010 and we don’t know what extension legislation, if any, will be enacted. We don’t even know the AMT exemption for this year! Congress might not pass extension legislation until next year! We can only guess what the tax laws are going to be after this year. Despite that, we need to estimate the taxes that may be due in April and otherwise work with our broken crystal balls.

Call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162 to make your year-end planning appointment now.

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Client appreciation event – Year End Planning For Employee Stock Options

Subscribers to this newsletter and Michael Gray, CPA’s Tax & Business Insight only are invited to “be our guest” for a hosted luncheon seminar at Hobee’s Restaurant at the Pruneyard. Registration is required and will be limited to 30 guests. (That’s right! No admission charge! Usually we charge $97 to attend!) Michael Gray, CPA will give a presentation about “Year-End Planning For Employee Stock Options”. The luncheon presentation will be from noon to 1:30 p.m.

To register, call Dawn Siemer on a Monday, Wednesday or Friday from 9 a.m. to 5 p.m. Pacific Time.

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Congressional Research Service report on employee stock options released

The Congressional Research Service has issued an updated report on employee stock options. The tax considerations and accounting requirements are explained. The discrepancy between the amount deducted by corporations for exercises of employee stock options compared to the amount expensed on a corporation’s financial statements is highlighted. This is a target of Congress, because the deductions far exceed the expense amounts. Changing the corporate tax deduction to conform to the amount reported as an expense would eliminate the parity between the amount the employee reports as income and the corporate tax deduction.

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California is “a little short of cash” for refunds

The Franchise Tax Board announced on October 14 that refunds on corporate and individual income tax returns will be delayed until there is enough cash in the state treasury to pay the refunds. As an alternative, overpayments can be applied to the next year’s estimated tax instead of applying for a refund. Then future estimated tax payments or withholding can be reduced. (Spidell’s Flash E-Email.)

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Small Business Jobs Act is enacted

President Obama signed the Small Business Jobs Act (the Jobs Act) into law on September 27, 2010. Finally we have some tax laws enacted this year, but many of the Bush tax cuts are still scheduled to expire after this year, the federal estate tax is still repealed for 2010 and we still don’t know what the alternative minimum tax exemption is for 2010.

Here are a few tax highlights of the Jobs Act:

  1. 50% first-year bonus depreciation has been extended for acquisitions from January 1, 2010 through December 31, 2010. Bonus depreciation has also been extended for personal property with a recovery period of 10 years or longer, and for transportation property. Unlike the expense election, there is no taxable income limit for bonus depreciation and there is no phase out based on the amount of equipment purchased.

    Under the new law, bonus depreciation is not allocated to cost for long-term contracts when the constructed assets have a depreciable life of seven years or less.

    In order to allow a bigger depreciation deduction when bonus depreciation is claimed for an automobile, the maximum deduction is increased an additional $8,000 when bonus depreciation is claimed. The 2010 maximum deductions will be $11,060 for passenger automobiles and $11,160 for light trucks.

  2. The Internal Revenue Code Section 179 expensing election limit has been increased for tax years beginning in 2010 and 2011 from $250,000 (former limit for 2010) to $500,000. The deduction will be phased out for equipment purchases exceeding $2 million (was $800,000 for 2010).

    The definition of Section 179 property eligible for expensing has temporarily been expanded to include qualified real property, defined as qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. The maximum amount of qualified real estate eligible for expensing is $250,000. Taxpayers may also elect to exclude qualified real estate from the expensing, such as if claiming the property would result in having more than $2 million in additions, phasing out the deduction.

    “Off the shelf” computer software also continues to be eligible for the expense election.

  3. S corporations pay a “built-in gains” tax for appreciated property disposed within 10 years after making the election. Under the American Recovery and Reinvestment Act of 2009, the holding period was reduced to seven years for 2009 and 2010. Under the Jobs Act, the holding period has been reduced to five years for dispositions in a tax year beginning in 2011, provided the fifth year in the recognition period precedes the tax year beginning in 2011.
  4. For qualifying stock acquired during the period from September 27, 2010 through December 31, 2010, the exclusion of gain for certain small business stock has been increased from 75% to 100%. Since this period is so short, I’m not going to explain the details. See your tax advisor.
  5. Effective for the first tax year beginning after December 31, 2009 (2010 for most taxpayers), the deduction for health insurance costs for a self-employed person for the individual and his or her immediate family for income tax reporting will also be deductible when computing the self-employment tax. (Let’s hope this one will be extended after 2010.)
  6. Effective for distributions after September 27, 2010, an employee can roll over in-plan distributions from a “regular” 401(k), 403(b) or 457 retirement plan account to a Roth account under the same plan. The plan must permit “in service” distributions, so plans might have to be amended to permit the transfer. In addition, for distributions during 2010, the taxpayer may either report the taxable income resulting from the transfer in equal amounts for 2011 and 2012 or elect to report all of the income for 2010. (Same as for regular to Roth IRA conversions for 2010.)
  7. The information return reporting requirements for payments of $600 or more have been extended to rental property expenses, effective for payments made after December 31, 2010.

For more details about how the new rules affect you, see your tax advisor, or call Michael Gray at 408-918-3161.

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Financial Insider Weekly broadcast schedule for October and November

Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 7:00 p.m., Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for the rest of October and for November:

October 20: Richard Lambie, Professional Fiduciary, “The Role of the Professional Fiduciary”
October 27: Mark Erickson, Attorney, “Divorce, California Style – Child Custody”
November 3: Mark Erickson, Attorney, “Divorce, California Style – Spousal Support”
November 10: Jeffrey Hare, Attorney, “Using a Checkbook LLC with a Self-Directed IRA”
November 17: Jann Besson, Attorney, Besson & Yarbrough, “Medi-Cal Benefits for Long-Term Disability”
November 24:, John Hopkins, Attorney, Hopkins & Carley, “Promoting Community Giving as a Family Value”

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. Online streaming video at www.bavc.org, “public access TV”

Past episodes are available at https://www.youtube.com/user/financialinsiderweek.

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

When a private company is purchased by a public company and the employees’ unvested ISOs or NQSOs are converted to options in the public company, is any income reported to the IRS? I am concerned this could be an AMT income amount.

Answer

No income is reported for regular tax or AMT.

Question

I have 2,000 shares of fully-vested NQSOs with a grant price of $33.05. The company’s stock is currently selling for $13.17.

I would like to exercise the options to take a tax loss, which would help with our tax liability next year. May we do this?

Answer

Maybe, but it would be crazy. You shouldn’t intentionally enter a transaction for a tax loss.

Instead of buying the shares using your stock options for $33.05, you can simply buy the same shares on the stock market for $13.17.

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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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