Michael Gray, CPA’s Option Alert #117

An irregular alert for issues relating to employee stock options

October 14, 2013
© 2013 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 will soon be over

For many Americans, Halloween is their favorite holiday. How about you? Be careful with those kamikaze kids out there.

One thing we all know is Halloween means the year will soon be over. I hope yours has been a good one.

It’s time to prepare for the end of the year. My schedule will be tight with various obligations and the holidays. Make your year-end planning appointment now. Call Dawn Siemer on Mondays, Wednesdays and Fridays from 9 a.m. to 5 p.m. at 408-918-3162.

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Final individual deadline is October 15

It’s too late for us to be able to prepare 2012 individual income tax returns for people who bring their information to us now. You can stop additional penalties and interest by filing late income tax returns as soon as possible. If you would like us to prepare your late 2012 income tax returns, please call Dawn Siemer Mondays, Wednesdays or Fridays from 9 a.m. to 5 p.m. at (408) 918-3162. Be aware that our time for personal meetings will be very limited.

We can also prepare amended income tax returns to clean up tax returns that were previously filed.

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Look before you leap! Employer considerations for an equity compensation plan

Like so many things in life, offering equity-based compensation to employees sounds cool and exciting until you get into the details. The costs of offering and maintaining a plan may be prohibitive for companies who may think they are conserving cash when offering these benefits to employees.

The game changed dramatically after the Enron and Worldcom scandals. Congress enacted Section 409A, which created standards for nonqualified stock options. In order to avoid severe penalty taxes, you now must have a “qualified” nonqualified plan.

The key issue is valuation, especially when company stock for which options are offered isn’t publicly traded. For private companies, valuation studies can be even more expensive than financial statement audits. Valuation studies should be performed at least annually and whenever there is a major change for the company, such as receiving rounds of venture funding.

I suggest that companies that offer stock options should also have audited financial statements, which are substantially more expensive than compiled or reviewed financial statements or only having your corporate income tax return prepared.

Companies that have audited financial statements have disclosure requirements for their equity compensation plans. Expensive complex econometric valuation formulas are required for outstanding stock options.

The payroll tax reporting for stock options and stock grants is also complex. For private companies, where is the cash going to come from to pay the taxes? Every year that shares received by exercising a nonqualified stock option or from a restricted stock grant vest for which a Section 83(b) election hasn’t been filed, another taxable event takes place that has to be valued and for which payroll taxes must be paid.

Companies that don’t have publicly-traded stock often don’t tell their employees what the “current fair market value” of their shares is. The company has to know whenever it grants a stock option, because the offering price in the option has to be at least the fair market value. Employees need to know the current fair market value of their shares in order to make an intelligent decision whether or not to exercise their options.

The administration for equity-based compensation can be even more involved than for a company’s retirement plan. Employees need to be able to access information about the history of their transactions for employer shares. Each year, confirmation of exercise statements, confirmation of exercise forms and IRS Forms 3921 and 3922 have to be prepared for employees who have exercised their options, received stock grants, or had shares vest from earlier exercises.

My guess is the annual cost for an outstanding stock option is $1,000 per year, per employee, per grant. That might be a low estimate.

The form of equity compensation with the lowest administration cost is a fully-vested stock grant.

There is a high price for the privilege of printing your own money!

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California restores a tax break for small business stock

In the Cutler decision, the exclusion of gain under Internal Revenue Code Section 1202 was declared unconstitutional in California. As part of its fiscal year-end group of legislation, California’s legislature restored the 50% exclusion for 2008 through 2012 in AB 1412. Governor Brown has approved the legislation.

The legislation eliminates the 80% payroll and property in California requirements.

The bill allows taxpayers 180 days from the date of enactment to file a claim for refund for 2008.

It’s too late for tax software to be updated for the exclusion for 2012. Taxpayers will generally file amended California income tax returns to claim the exclusion.

Let us know if you think you may be eligible to claim the exclusion on an amended California income tax return for 2008 through 2012.

(Spidell’s Flash E-mail, “Governor signs Cutler bills”, October 4, 2013.)

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IRS has cut back operations

Thanks to the U.S. government shut down cutting back funding, the IRS has cut back its operations. The IRS will continue to receive income tax returns. Almost all live services, including taxpayer assistance and tax audits are suspended. Automated services are still operational, and automated collection notices will continue to be mailed.

The IRS web site still works. (Thank goodness!)

(Spidell’s Flash E-mail, “IRS announces cutback in operations”, October 2, 2013.)

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Community public access television needs our help

As you can see below, 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.

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Financial Insider Weekly broadcast schedule for October and November.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 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 October and November:

October 11, 2013, attorney Robert E. Temmerman, Jr., Temmerman, Cilley & Kohlmann, LLP, “I’m a trustee! Now what?”
October 18, 2013, James Brown, ASA, CFP®, Perisho, Tombor, Brown CPAs, “The role of a business valuation specialist”
October 25, 2013, attorney Naomi Comfort, Silicon Valley Elder Law, PC, “Special needs trusts”
November 1, 2013, attorney William Mahan, of counsel to Gates Eisenhart Dawson, “Why you need a will”
November 8, 2013, attorney William Mahan, of counsel to Gates Eisenhart Dawson, “Tax considerations of title”
November 15, 2013, attorney Bettie Baker Marshall, “Legal considerations of caring for incapacitated persons”
November 22, 2013, Emmett Carson, PhD, CEO, Silicon Valley Community Foundation, “Promoting Community Giving as a Family Value”
November 29, 2013, Geraldine Barry, President, San Jose Real Estate Investors Association, “How I got started investing in real estate”

Financial Insider Weekly is also broadcast as follows:

  • Monday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Monday at 4:00 p.m. and 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill and broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Mondays at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
  • Tuesdays at 2:30 a.m. and 12:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Tuesday at 4:00 p.m. and 7:00 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
  • Wednesdays at 6:00 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • Wednesday 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
  • Fridays at 2 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • Friday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Friday at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
  • Friday at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
  • 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 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
  • Saturdays at 1 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County

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

For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.

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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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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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