Michael Gray, CPA’s Option Alert #86
An irregular alert for issues relating to employee stock options
November 3, 2010
© 2010 by Michael Gray, CPA
(If you find this information valuable, please pass it on to a colleague!)
Table of Contents
- Time for year-end planning
- Subscriber appreciation event — Year End Planning
- Can’t make the live event? Participate in our teleseminar!
- A South Bay live luncheon seminar for tax professionals
- A Peninsula live luncheon seminar for tax professionals
- Should you exercise stock options during 2010?
- Comments issued on basis reporting by stock brokers
- Final basis reporting regulations for securities sales
- IRS will begin accepting records in electronic format
- IRS considering relaxing some return preparer requirements
- Financial Insider Weekly broadcast schedule
- Questions and Answers
- Follow me on Twitter, Facebook and LinkIn!
- Check out my blog
- Interested in our other newsletters?
- IRS Circular 230 Disclosure
- Consult with a tax advisor
- Subscribe to Michael Gray, CPA’s Option Alert
The year is almost over! Time for year-end planning.
The holiday season will soon be upon us. Some retailers decided to get an early start and had “Black Friday” sales last week!
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.
Subscriber 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. on November 12.
To register, call Dawn Siemer on a Monday, Wednesday or Friday from 9 a.m. to 5 p.m. Pacific Time at (408) 918-3162.
Can’t make the live event? Participate in our teleseminar.
For those who can’t attend the event in Campbell, Michael Gray will present a telephone seminar on Year End Planning For Employee Stock Options at 1 p.m. to 2:30 p.m. Pacific Time on Tuesday, November 23. As a Thanksgiving gift, subscribers to this newsletter can participate for free! You only pay any applicable long-distance charges. If you pay 7¢ per minute, the total would be $3.50.
You must preregister to participate. To register, call Dawn Siemer on a Monday, Wednesday or Friday from 9 a.m. to 5 p.m. Pacific Time at (408) 918-3162.
A South Bay live luncheon seminar for tax professionals
Michael Gray, CPA will give a live luncheon presentation for the Tax Interest Group, Silicon Valley San Jose chapter of the California Society of Certified Public Accountants on Friday, November 19 from noon to 1:30 p.m. The topic is the Small Business Jobs Act of 2010. The luncheon will be at Bella Mia Restaurant in San Jose. The pre-registered investment is $30 for CalCPA members and $35 for nonmembers. For reservations, call Stephanie Stewart at 408-983-1122 or register online at www.calcpa.org.
A Peninsula live luncheon seminar for tax professionals
Michael Gray, CPA will give a live luncheon presentation for the Tax Interest Group, Peninsula Silicon Valley chapter of the California Society of Certified Public Accountants on Wednesday, November 17 from noon to 1:30 p.m. The topic is the IRS Disclosure and Use Rules. The luncheon will be at Hobees Restaurant in Belmont. The pre-registered investment is $25 for CalCPA members and $30 for nonmembers. For reservations, call Jane Dunbar at 650-802-2465 or register online at www.calcpa.org.
Should you exercise stock options during 2010?
This is a loaded question. So much will depend on your individual circumstances that you really should discuss your situation with a tax advisor.
The “buzz” in Washington is the Democrats are willing to talk about extending the Bush tax breaks beyond 2010. President Obama’s plan was to cut off the extension for married couples with income above $250,000, but no one wants to see a tax increase when we are having a slow economic recovery. I think the Bush tax cuts are going to be extended for all taxpayers through 2012.
So you probably won’t be hurt tax wise by waiting to exercise nonqualified stock options until after 2010.
On the other hand, we have seen how dysfunctional Congress can be. Estate tax repeal wasn’t supposed to happen in 2010, and here we are at the end of the year with repeal still in effect. So, if you want to “play it safe” and be sure the current maximum tax rate applies to your exercise, now is the time to do it.
If you are going to exercise incentive stock options and try to hold the stock to meet the holding requirements, it’s too late to qualify for the 15% rate for 2010 if you exercise now. Generally I prefer for these exercise and hold transactions to be done early in the year.
The alternative minimum tax rates won’t change when the Bush tax cuts expire.
Comments issued on basis reporting by stock brokers
The Information Reporting Program Advisory Committee (IRPAC) is a group of representatives from the payer community and tax practitioners interested in the Information Reporting Program. (Information reports include items like W-2 forms and Forms 1099 that become source documents for the IRS and information used by taxpayers when preparing their income tax returns.)
The IRPAC has issued comments to the IRS about proposed information return requirements, particularly relating to stock brokers, issued last December.
The comments noted that detailed basis information for employee stock options isn’t required to be provided for transactions until after 2012.
The comments reviewed the special basis problems relating to employee stock options and stock grants, and reminded the IRS to keep these in mind when developing future guidance. The IRPAC recommended that basis information should not be provided before 2013, because it would be confusing to taxpayers and would probably lead to reporting errors.
(2010 IRPAC Report Appendices (October 21, 2010.)
IRS issues final regulations about basis reporting for securities sales
The IRS has issued final regulations about how to determine the tax basis of securities sold and the information to be provided by stock brokers and mutual funds about the tax basis of securities sold.
The regulations include amended Section 1.1012-1(c), for determining the basis of stock., including specifically identifying stock that is sold, and Section 1.1012-1(e) relating to electing to use the average basis method.
Identification must be done no later than the earlier of the settlement date or the time for settlement. The identification can be done in a standing order. The identification can be done in an email.
Since the rules for reporting basis of securities received as equity compensation aren’t effective until 2013, the regulation requires the information be reported for transfers during 2011 and 2012 (including transfers by plan administrators to stock brokerage accounts) based on the option price or purchase price of the shares. The IRS is developing Form 3921, “Exercise of an Incentive Stock Option Under Section 422(b) and Form 3922, “Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c) to help taxpayers determine the tax basis of stock acquired during 2011 and 2012.
(T.D. 9504, October 13, 2010.)
IRS will begin accepting records in electronic format
The IRS has announced that it will begin accepting taxpayer records in electronic format instead of traditional books and records for tax audits. The IRS is training agents to use QuickBooks Premier Accountant Edition. Such records should not be submitted to the IRS via email.
(Headliner at the IRS web site, www.irs.gov.)
IRS considering relaxing some return preparer requirements
In a speech on October 26 to the AICPA’s Fall Tax Meeting in Washington, D.C., IRS Commissioner Doug Shulman provided some welcome news to tax practioners relating to implementation of the new return preparer requirements.
For 2011, which is the first year of implementation, the continuing education requirements will be waived. The IRS hasn’t worked out the details of how to approve the classes yet.
The IRS is considering waiving the requirement that a preparer meet the registration requirements when the preparer is working for a CPA, attorney or an enrolled agent who will sign the return. If the IRS adopts this position, it will be very helpful to CPAs, attorneys and enrolled agents who hire temporary workers for tax season and for new graduates hired by the firms. There still may be practical issues to be ironed out for store front tax return preparation businesses.
Financial Insider Weekly broadcast schedule for November and December
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 November and December:
- 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”
- December 1: Michael Desmarais, Attorney, “Your rights as a beneficiary of an estate or trust”
- December 8, Robert Temmerman, Jr., Attorney, Temmerman, Cilley & Kolmann, “I’m an executor. Now what?”
- December 15, Robert Temmerman, Jr., Attorney, Temmerman, Cilley & Kolmann, “I’m a trustee. Now what?”
- December 22, James Brown, ASA, CFP®, Perisho, Tombor, Ramirez, Filler & Brown PC, “The Role of the Business Valuation Specialist”
- December 29, Frank Doyle, Attorney, WealthPLAN, “Estate Planning Using Family Limited Partnerships”
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!
Questions and Answers
Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter.
I saw that you wrote in 2003 relating to the installment sale of ISO stock and that you believe that a disqualified disposition of ISO stock would not qualify for installment sale reporting. Do you believe the same for NQSOs?
Could an NQSO be converted to a nonqualified deferred compensation plan?
Right. There is no postponement of reporting income relating to the exercise of an NQSO unless the stock isn’t vested or is subject to restrictions under SEC Rule 16(b). For a buyout of the options themselves, postponement would require some sort of structure under the deferred compensation rules, Section 409A.
Under the regulations for Section 409A, it’s very difficult to convert a nonqualified option to a nonqualified deferred compensation plan. This was done before Section 409A was adopted.
My company has a stock option plan. I have some of them.
If my company was sold to a privately-held company, would the new company be required to purchase the stock from those holding the options?
Would employees whose options are 100% vested remain vested? Would they have a limited time to exercise or purchase their shares?
You have asked a legal question that I’m not qualified to answer. You might seek an attorney who specializes in this area.
In my experience, part of the negotiations for the purchase of a company includes individuals holding options.
The options do remain vested. They might be bought out or converted to options for stock of the acquiring company.
For employees holding incentive stock options, I suggest they consider exercising before the acquisition, because a disqualified disposition of ISO shares isn’t subject to employment taxes, but the buyout of the options themselves is subject to income tax withholding and employment taxes.
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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.
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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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)