Michael Gray, CPA’s Option Alert #94

An irregular alert for issues relating to employee stock options

September 12, 2011
© 2011 by Michael Gray, CPA
ISSN 1931-2768

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

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Where have we been?

Janet and I left July 28 for a Princess Cruise in the Greek Isles and returned August 15. Dawn, John and Kara took their vacation at Yosemite and other California destinations from August 27 and returned to work September 7. Meanwhile, I have been churning through projects. So, this newsletter has been on the back burner.

It’s good to be back!

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The year is two-thirds over!

It happens every year. Before we know it, another year is coming to a close. Labor Day is past. September 23 is the first day of Autumn. Most of the children are back in school. Before we know it, Halloween, Thanksgiving and Christmas will be here. It’s time to start thinking about year-end tax planning. To make an appointment, call Dawn Siemer at 408-918-3162 on a Monday, Wednesday or Friday.

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The next estimated tax payment for individuals is due September 15.

Remember that California has “front loaded” the first two estimated tax payments and there is no September estimated tax payment for California. If you are paying your estimated tax payments based on your actual income and deductions for this year, be prepared to assemble your information for the September estimated tax computations.

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Extended calendar year returns, except individuals, are due September 15.

The extended due date for 2010 income tax returns of calendar year corporations, S corporations, partnerships, estates and trusts is September 15, 2011. Hope yours is already done!

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Extended income tax returns for individuals are due October 17.

The extended due date for 2010 individual income tax returns is October 17, 2011. (October 15 falls on a Saturday.) We can still take two more new clients for preparing their 2010 individual income tax returns. To make an appointment, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

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

During the summer, we are focusing 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 on a Monday, Wednesday or Friday at 408-918-3162 from 9 a.m. to 5 p.m.

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Need help for upcoming IPO, acquisition, or leaving employer?

The stock market has returned to life. We are seeing a number of employees who want planning help for their employee stock options relating to a coming initial public offering, acquisition of their employer or leaving their employer. May we be of service to you for planning for these events? To make an appointment, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162 from 9 a.m. to 5 p.m.

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Change in corporate deduction for stock options proposed

Senator Levin of Michigan and Senator Brown of Ohio have introduced proposed legislation, the “Ending Excessive Corporate Deductions for Stock Options Act”, Senate Bill 1375. Under the proposed legislation, the deduction for compensation relating to employee stock options would be the same for federal income tax reporting as for financial reporting. The option is valued at the time it is granted based on methods such as Black Scholes, binomial or lattice. Currently, the corporate deduction is the same as the amount the employee or other recipient reports as ordinary income, usually the excess of the fair market value over the option price on the date of exercise.

It is questionable whether this will raise significant federal revenue, because most employee stock options expire worthless. Senator Levin just wants the change because he believes the current system is inequitable. The Financial Accounting Board has decided the financial reporting method is “correct,” so that’s what should be followed. He has made this proposal before without broad support.

This proposal eliminates a perceived incentive for granting employee stock options. In my opinion, this is like killing a goose that lays golden eggs. Stock options have allowed employees to create wealth using their brain power instead of relying on capital investment. Evidently, Senators Levin and Brown think that’s is a bad thing that should be discouraged.

With the current federal deficits, there could be a populist movement in support of this proposal. If you disagree, I suggest that you write your representatives in Congress.

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New requirement specified for deduction of option compensation

The corporate deduction for certain “covered employees” of publicly-traded corporations is limited under Internal Revenue Code Section 162(m) to $1 million unless the compensation is “performance-based,” such as from employee stock options. “Covered employees” include the chief executive officer of the corporation or individual acting in that capacity and employees whose compensation is required to be reported to the SEC because the individual is one of the four highest compensation officers for the taxable year.

The IRS has issued proposed regulations that require the maximum number of shares with respect to which options or rights may be granted to each individual employee for a specified period must be stated in the option plan in order for the related compensation to qualify as deductible “performance based” compensation.

The requirement does not apply to corporations that aren’t publicly held or to options that were granted before the corporation was publicly held. The options granted before the company was publicly held must have been disclosed in the prospectus accompanying the IPO.

An example in the proposed regulations of a qualifying provision is “no individual salaried employee shall receive options for more than 100,000 shares over any 3-year period.”

The proposed regulations would apply to taxable years ending on or after the date of publication of the Treasury decision adopting the rules as final regulations in the Federal register.

(NPRM REG-137125-08, June 24, 2011.)

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Financial Insider Weekly now broadcast in Morgan Hill.

Morgan Hill cable subscribers can now watch Financial Insider Weekly on MHAT, cable channel 19 on Mondays and Tuesdays at 4 p.m. and 7 p.m. Pacific Time. The program will be simultaneously broadcast on the internet as streaming video at www.mhat.tv. Tell your friends!

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Financial Insider Weekly broadcast schedule for September and October.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 8:00 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 September and October:

September 16, Scott Haislet, attorney and CPA, “Irrevocable life insurance trusts”
September 23, Peggy Martin, CLU, ChFC, MSFS of The Family Wealth Consulting Group, “The role of life insurance in estate and financial planning”
September 30, Stanlley Zlotoff, attorney, “Bankruptcy for individuals”
October 7, John Olagues, Truth In Options, “Employee Stock Option Basics”
October 14, John Olagues, Truth In Options, “Employee Stock Option Hedging Strategies”
October 21, Mark Erickson, attorney, “Divorce – California Style: Basics”
October 28, Mark Erickson, attorney, “Divorce – California Style: Spousal Support”

Financial Insider Weekly is also broadcast as follows:

  • Sunday at 5:30 a.m. on Comcast Channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola.
  • 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 3:30 p.m.on Comcast Channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola.
  • Monday at 4 p.m. and 7 p.m. Pacific Time on cable channel 19 in Morgan Hill. Broadcast on the internet at the same time as streaming video at www.mhat.tv.
  • Monday at 7:30 p.m. on Comcast channel 15 in Saratoga.
  • Tuesday at 4 p.m. and 7 p.m. Pacific Time on cable channel 19 in Morgan Hill. Broadcast on the internet at the same time as streaming video at www.mhat.tv.
  • Tuesday at 9:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County.
  • 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 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”.
  • Saturdays at 12:30 p.m. on Comcast channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola.

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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Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter. Email your questions to mgray@stockoptionadvisors.com.

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Follow me on Twitter, Facebook or LinkedIn!

If you enjoy Twitter, please follow me at 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 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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