Michael Gray, CPA’s Option Alert #103
An irregular alert for issues relating to employee stock options
August 6, 2012
© 2012 by Michael Gray, CPA
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Table of Contents
- Welcome, Minerva Siemer!
- Remember September 17 estimated tax due date.
- Updated book on employee stock options to be released this month.
- The tax planning environment is cloudy.
- IRS issues procedure for Section 83(b) election.
- Dividends on restricted stock aren’t automatically performance-based compensation.
- Refundable minimum tax credit provisions are expiring, making tax planning more complex for some taxpayers.
- Offshore dependents must be U.S. citizens for exemptions.
- Community public access television needs our help
- Financial Insider Weekly broadcast schedule
- Follow me on Twitter, Facebook and LinkedIn!
- Check out my blog
- Do you know about our other newsletters?
- IRS Circular 230 Disclosure
- Consult with a tax advisor
- Subscribe to Michael Gray, CPA’s Option Alert!
Welcome, Minerva Siemer!
Minerva Siemer was born about 8:14 p.m. on August 1, 2012. She weighed about six pounds, 9 ounces and was 20 inches long. She is a beautiful baby girl with dark, curly hair. Minerva is the second child for her parents, my daughter Dawn and her husband John Siemer. She is the fourth grandchild for my wife, Janet and I. We are thrilled!
Remember September 17 estimated tax due date.
The next federal estimated tax payment for individuals and calendar-year corporations is September 17. In most cases, California doesn’t require an estimated tax payment for September 17 because the first two estimated tax payments are front loaded.
If your estimated tax payments aren’t based on last year’s income tax returns, you should be working with your tax advisor to annualize your tax liability.
It’s time for tax planning and working on amended, extended and late income tax returns.
It’s time to have a second look at income tax returns that were filed for possible amended income tax returns. Taxpayers who filed extensions are also looking for help getting their income tax returns done.
If you would like our help, call Michele Brantley on Wednesdays from 8:30 a.m. to 5:30 p.m. Pacific Time to make an appointment. Michele’s telephone number is 408-918-3162.
Updated book on employee stock options to be released this month.
Employee Stock Options – Executive Tax Planning – 2012 Edition by Michael Gray, CPA will be released this month. You can buy it for half price – $12.49, plus shipping and handling and applicable California sales tax. This offer expires September 15th 2012. The book is 46 pages, and is packed with insights, including an Options Comparison Chart, which employees with options will find invaluable.
Find details about the book and order online at: Silicon Valley Publishing Company Or call Michele Brantley to order at 408-918-3162 on Tuesdays, Wednesdays, or Thursdays.
The tax planning environment is cloudy.
The Presidential and other elections mean that little is likely to be done relating to expiring tax laws for this year until after the election – probably early in 2013. The alternative minimum tax exemption “patch” adjustment for inflation hasn’t been passed for 2012.
California’s recent revelation of “side accounts” for various agencies have probably reduced the likelihood that Jerry Brown will be successful in have a tax increase approved by the voters this fall.
The increased federal estate tax and generation-skipping tax exemption is an opportunity for many families to make some big gifts during 2012, possibly using a “dynasty trust”. There is a risk of “claw back” but even the 35% tax rate for taxable gifts is attractive for 2012.
IRS issues procedure for Section 83(b) election.
The Section 83(b) election is a key election for employee stock options. The election must be made within 30 days of receiving unvested property for services. (For nonqualified options, within 30 days of exercising an option for non-vested stock.)
When a taxpayer makes the election, restrictions that would otherwise postpone the recognition of income for the transfer of property in connection with services, such as unvested stock, are disregarded. For example, an employee may receive an unvested non-qualified stock option to purchase stock of a start up company for 1¢ per share. By immediately exercising the option and making a Section 83(b) election, the employee has no current taxable income. The holding period for the stock begins on the date of exercise. If the employee sells the stock after holding it for more than a year, the gain for the stock is long-term capital gain.
If the employee exercised the option and didn’t make the election, additional wages (taxable as ordinary income at ordinary income tax rates) would be reported as the stock vested, possibly resulting in much bigger income tax bills. Any ordinary income reported is added to the tax basis (cost for determining gain or loss) of the property received. If the stock is forfeited because of failing to meet vesting requirements, such as early termination, any loss attributable to the additional wages relating to the exercise isn’t tax deductible.
Service providers who are not employees can also receive property subject to vesting requirements, and may make a Section 83(b) election. The ordinary income may be subject to self-employment tax for these taxpayers.
The IRS has issued a Revenue Procedure reminding taxpayers of the federal income tax consequences of transfers of property in exchange for services. The Revenue Procedure includes several examples with and without a Section 83(b) election.
The election must be mailed to the IRS at the same address as for mailing the taxpayer’s individual income tax return and a copy must be provided to the employer and another copy included with the taxpayer’s federal income tax return for the year in which the property was received (stock option was exercised).
A sample election form is included with the Revenue Procedure. This particular form isn’t required in order to make an effective election, but the election should include the same information. The form is also described in the IRS’s regulations.
A Section 83(b) election doesn’t apply for regular tax reporting to unvested stock received from exercising an incentive stock option, but does apply for that stock for alternative minimum tax reporting.
(Revenue Procedure 2012-29, June 26, 2012.)
Dividends on restricted stock aren’t automatically performance based compensation.
The IRS has ruled that dividends paid on restricted stock aren’t automatically performance-based, for the $1 million compensation deduction limit under Internal Revenue Code Section 162(m). Income relating to grants of restricted stock on employee stock options usually are considered performance- based, and aren’t subject to the $1 million annual limit.
In order to be performance based, compensation must be paid for attaining preexisting performance goals based on an objective standard. The payment must also be approved by the board of directors and the shareholders of the corporation.
(Revenue Ruling 2012-19.)
Refundable minimum tax credit provisions are expiring making tax planning more complex for some taxpayers.
The refundable minimum tax credit provisions expire after December 31, 2012.
Oversimplified, under the provisions half of the minimum tax credit is recovered like an estimated tax payment after a three-year waiting period. The other half is similarly recovered the next year. It appears the last year that alternative minimum tax could have been generated for which a minimum tax credit is available is 2008.
Any minimum tax credit recovered for other reasons, such as the sale of ISO stock, reduces the refundable credit.
(See the article, Refundable Minimum Tax Credit Available for 2008 at http://www.stockoptionadvisors.com/refund)
With this scenario, I would usually encourage a client to consider postponing selling ISO stock until 2013 to maximize the refundable credit. However, the 15% maximum federal income tax rate for long-term capital gains is also scheduled to expire after 2012, so postponing selling the stock until 2013 could result in a higher tax.
With the current election-related stalemate in Congress and the lame-duck session after the election, it doesn’t seem likely this situation will be resolved until after 2012. Be alert that employee blackouts could reduce your flexibility for year-end planning.
If you have this situation, I recommend that you consult with a tax advisor to develop a “best guess” strategy. To make an appointment with Michael Gray, call Michele Brantley on Wednesdays at 408-9162.
Offshore dependents must be U.S. citizens for exemptions.
The Tax Court upheld the IRS in denying personal dependent exemption deductions for a U.S. citizen parent living outside the U.S., Canada and Mexico. The taxpayers were a husband and wife living in Israel. The wife was a U.S. citizen. Their six children were all born in Israel.
The children later became naturalized U.S. citizens, but they didn’t qualify as dependents for U.S. tax purposes for the years before they became citizens.
Non-citizens can qualify as dependents when they are residents of the United States or a country contiguous to the United States.
(Leah M. Carlebach and Uriel Fried v. Commissioner, U.S. Tax Court, CCH Dec. 59,127, 139 T.C. No. 1, (Jul. 19, 2012).)
Community public access television needs our help.
Public access television is a vital part of our educational outreach to various communities. These are usually nonprofit, charitable organizations, like public television stations. Unlike those stations, most of the programming for the public access stations comes from local producers.
This programming includes the local arts, productions by students at local schools, community outreach by churches, independent local producers discussing current social issues, educational programming by local providers like ourselves and much more. In other words, public access television makes a unique, important contribution to the communities it serves.
With the difficult times we are experiencing, many public access stations are facing severe financial challenges, and might not survive without more community financial support. I urge you to consider making a donation to your local public access television station. Here is a link for a list of public access television stations in California: http://www.communitymedia.se/cat/linksca.htm.
Financial Insider Weekly broadcast schedule for July and August.
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 July and August:
- July 6, 2012, David Howard, attorney, Hoge, Fenton Jones & Appel, “Information reporting requirements for foreign bank accounts and foreign trusts”
- July 13, 2012, James Brown, ASA, CFP®, Perisho, Tombor, Ramirez, Filler & Brown, PC, “The role of the business valuation specialist”
- July 20, 2012, Dean Fabro, Bank of the West, “Small Business Financing”
- July 27, 2012, Francis Doyle, attorney, WealthPLAN, “Preserving family assets using a family limited partnership or LLC”
- August 3, 2012, Judy Barber, Family Money Consultants, LLC, “The transfer of family wealth to the next generation: What’s the money for?”
- August 10, 2012, Judy Barber, Family Money Consultants, LLC, “Raising money-smart kids in the midst of affluence”
- August 24, 2012, Gregory Carpenter, BTI Group Merges & Acquisitions, “How to buy a business”
- August 31, 2012, Gregory Carpenter, BTI Group Merges & Acquisitions, “Preparing to sell a business”
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
- Monday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- 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
- Wednesday at 8 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
- Thursday at 5:30 p.m. on Comcast channel 27 in Santa Cruz County and Charter Communications channel 73 in Capitola and Watsonville
- Friday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- 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”
- Friday at 8:00 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
- Saturdays at 12:30 p.m. on Comcast channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola
- Saturdays at 9:00 a.m. and 6:00 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
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!
Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter. Email your questions to email@example.com.
See our free report, “Nonqualifed Stock Options – Executive Tax and Financial Planning Strategies” at http://www.stockoptionadvisors.com/isofaq/non-q_stock/
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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.
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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.
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.
Subscribe to Michael Gray, CPA’s Option Alert!
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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)