Michael Gray, CPA’s Option Alert #122
An irregular alert for issues relating to employee stock options
March 14, 2014
© 2014 by Michael Gray, CPA
(If you find this information valuable, please pass it on to a colleague!)
Table of Contents
- Please send your tax information now
- The IRS issues new regulations about “restricted property”
- Small business stock exclusion helps avoid net investment income tax
- Sales of ESPP stock require special attention
- IRS releases instructions for net investment income tax form
- Foreign account report changes for 2013
- Please share your good experiences with Michael Gray, CPA.
- Does your group need a speaker?
- Community access television needs our help
- Financial Insider Weekly broadcast schedule
- Follow me on social media!
- Check out my blog
- Do you know about our other newsletters?
- Consult with a tax advisor
- Subscribe to Michael Gray, CPA’s Option Alert
Please send your tax information now
Our priority for tax return preparation is mostly on a first-in, first-out basis. If we haven’t received your tax information by March 15, we will probably apply for an extension of time to file your income tax returns. If you are missing some 1099 forms from an investment account or a Schedule K-1 for a partnership, please send the rest of your information now and the rest when you receive it to be “in the queue” and have your information otherwise processed in case an extension is required.
The IRS issues new regulations about “restricted property”
In order to avoid immediate taxation, property received relating to employment (such as through a stock grant or by exercising a non-qualified stock option) must be subject to a “substantial risk of forfeiture.”
The IRS has issued amendments to Treasury Regulations Section 1.83-3, defining a substantial risk of forfeiture. The amendment makes it clear that temporary market blockages, such as a lock out after a public offering or during periods close to the announcement of a company’s earnings, are disregarded and are not a substantial risk of forfeiture. Only restrictions associated with rendering services or refraining from performing services, such as vesting, are effective as a “substantial risk of forfeiture.” Further, if an employer routinely waives the forfeiture, it will be disregarded.
(T.D. 9659, February 25, 2014.)
Small business stock exclusion helps avoid net investment income tax
If you sold stock, including employer stock received by exercising an employee stock option or a stock grant, that you held for more than five years and otherwise meets the requirement as “small business stock” under Internal Revenue Code Section 1202, remember to claim the exclusion of 50% of the long-term capital gain. In the past, this tax benefit may have been “blown off” by tax return preparers because a special federal tax rate of 28% applies to the gain, so the tax was 14% instead of 15%. Big deal!
For 2013, the 3.8% net investment income tax applies to most capital gains for high-income taxpayers. Suddenly that exclusion looks more attractive.
In addition, California has adopted tax law changes that will expire after 2013, but will now allow California taxpayers to claim the small business stock exclusion on their California income tax returns, on which long-term capital gains are taxed at the same (high) tax rates as any other income.
See your tax advisor about this. If you don’t have a tax advisor, that’s our business! Call Dawn Siemer at 408-918-3162 to make an appointment.
Sales of ESPP stock require special attention
Many taxpayers (and tax return preparers) make errors when reporting the sale of stock acquired through an employee stock purchase plan, or ESPP. In order to make a “qualifying” sale of ESPP stock, the stock must have been held more than two years after the grant or “subscription” date and more than one year after the purchase date.
If the holding period isn’t met, the excess of the fair market value of the stock on the purchase date over the stock purchase price is taxed as ordinary income and should be reported on the employee’s W-2 form. The ordinary income amount is added to the purchase price of the stock to compute the “tax basis” or cost of the stock reported on Form 8949 (Schedule D). If the original cost was reported by the stock brokerage company to the IRS on Form 1099B, an adjustment should be separately reported on the form.
Unlike an incentive stock option, ordinary income will probably still be required to be reported when ESPP shares are sold and the holding period requirements are met. The ordinary income to be reported is the lesser of (1) 15% (or the applicable discount percentage under the plan) of the fair market value of the stock as of the grant or “subscription” date, or (2) the gain on the sale of the stock. Employers sometimes report this ordinary income amount on Form W-2 for their employees, but often don’t. Like the disqualified disposition scenario above, the ordinary income amount is added to the purchase price of the stock to compute the “tax basis” or cost of the stock reported on Form 8949 (Schedule D). If the original cost was reported by the stock brokerage company to the IRS on Form 1099B, an adjustment should be separately reported on the form.
The “good” news is this ordinary income isn’t subject to employment taxes like Social Security and Medicare taxes and also isn’t subject to the 3.8% net investment income tax.
By the way, if an individual owns ESPP shares when he or she dies, the ordinary income amount that would have been realized if it was sold on the date of death is taxable on the decedent’s final individual income tax returns. This item probably has one of the lowest compliance rates of anything in the Internal Revenue Code, because very few people know about it!
IRS releases instructions for net investment income tax form
The IRS has finally issued 20 pages of instructions for Form 8960, Net Investment Income Tax – Individuals, Estates and Trusts. This is the 3.8% tax on net investment income for high-income taxpayers, which became effective in 2013. You can get the instructions at www.irs.gov.
Foreign account report changes for 2013
The form number for reporting foreign accounts has changed to Form 114 from Form 90-22.1 for 2013. The form should only be efiled for 2013. Remember the due date for the form for 2013 is June 30, 2014, and no extensions are permitted. The “timely mailed is timely filed rule” also didn’t apply to this form, but the issue should be eliminated with efiling.
Please share your good experiences with Michael Gray, CPA.
As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm. Some of the sites where you can share your experiences include yelp.com, siliconvalley.citysearch.com, and Google+.
Does your group need a speaker?
We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to employee stock options, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as “How I created a public access television show broadcast on eleven Bay Area stations.” To make arrangements, call Michael Gray at 408-918-3161.
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.
Financial Insider Weekly broadcast schedule for March and April.
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 March and April:
- March 7, 2014, David Howard, attorney at law, Hoge, Fenton, Jones & Appel, “Tax reporting of foreign bank and investment accounts for individuals”
- March 14, 2014, Dick Blakeley, The Blakeley Group, “Setting family financial goals and reaching them”
- March 21, 2014, Alan Nobler, attorney at law, “How a collaborative team can help preserve your legacy”
- March 28, 2014, Stephen H. Salmeyer, attorney at law and psychologist, “Why emotions matter when resolving financial disputes”
- April 4, 2014, attorney Mary Russell, Stock Option Counsel, “Employee Stock Option Basics”
- April 11, 2014, attorney Francis Burton Doyle, WealthPlan, “Developments for family limited partnerships and LLCs”
- April 18, 2014, attorney Francis Burton Doyle, WealthPlan, “Elder abuse issues in estate planning”
- April 25, 2014, Judy Barber, Family Money Consultants, LLC, “Raising money-smart kids in the midst of affluence”
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 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!
Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter. Email your questions to firstname.lastname@example.org.
See the books mentioned at http://http://www.siliconvalleypublishingcompany.com/products/secrets-of-tax-planning-for-employee-stock-options-2014-edition or the Special Report, Nonqualified Stock Options – Executive Tax and Financial Planning Strategies at http://www.stockoptionadvisors.com/non-q_stock.
Also, consider attending our in person or online seminars about Tax Planning for Employee Stock Options on January 16 or 17, 2014, mentioned earlier in this newsletter.
Follow me on social media!
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.
Check out my blog.
I have also started a blog at michaelgraycpa.com. Check it out!
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.
Consult with a tax advisor
For our readers who arenâ€™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!
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.
(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)