Michael Gray, CPA’s Option Alert #128
An irregular alert for issues relating to employee stock options
October 20, 2014
© 2014 by Michael Gray, CPA
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Table of Contents
- Employee allowed to revoke a Section 83(b) election
- A Section 83(b) election can be a tax trap!
- Some U.S. residents from Canada get tax relief
- Do you need help with amended income tax returns?
- Does your group need a speaker?
- Please share your good experiences with Michael Gray, CPA
- Correction of Financial Insider Weekly broadcast schedule
- 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
Employee allowed to revoke a Section 83(b) election
The IRS gave consent for an employee to revoke a Section 83(b) election within 30 days after receiving shares of employer common stock as compensation from the employer.
Under Revenue Procedure 2006-31, a request to revoke a Section 83(b) election will be allowed provided it is submitted during the period in which the election can be made, which ends 30 days after compensatory property is received.
(Letter Ruling 201441006, July 8, 2014.)
A Section 83(b) election can be a tax trap!
When you make a Section 83(b) election, you are electing to treat unvested property received as compensation as if it was fully vested. If you didn’t make the election, the compensation amount would be determined when the property vested.
For example, Sally Employee makes an early exercise of a non-qualified stock option for 1,000 shares of employer stock on January 1, 20X1. The fair market value (FMV) of Employer stock received on that date is $22 per share and the option price is $2 per share. Under the terms of the option, the shares won’t vest until December 31, 20X2.
Sally makes a timely Section 83(b) election on January 5, 20X1. She therefore reports as additional wages 1,000 shares X ($22 FMV – $2 option price) = $20,000 for 20X1. Her holding period for the stock starts on January 1, 20X1, and her tax basis for the stock is $22 per share.
Suppose Sally didn’t make the election and continued to work as an employee at the company until the shares vested on December 31, 20X2, when the FMV of the stock is $32 per share. In that case, Sally would report 1,000 shares X ($32 FMV – $2 option price) = $30,000 as additional wages for 20X2. Her holding period for the stock would start on December 31, 20X2 and her tax basis for the stock would be $32 per share.
The first “tax trap” of a Section 83(b) election is if the price of the stock falls. What if the price of the stock on December 31, 20X2 was $12 per share? In that case, if Sally didn’t make the Section 83(b) election, her additional wages would be 1,000 shares X ($12 FMV – $2 option price) = $10,000. She would report $10,000 less wages if she didn’t make the election.
The second “tax trap” is if there is a forfeiture. What if Sally was laid off on December 1, 20X2? She would forfeit her shares back to the company for the option price of $2 per share. Under Section 83(b)(1), no deduction is allowed for the compensation income reported for the year of exercise. In other words, if Sally made the Section 83(b) election, she would have reported $20,000 as additional wages for 20X1, but no deduction would be allowed for 20X2.
The most favorable time to make the election is when there is little or no excess of the FMV of the stock over the option price at the date of exercise. Since you have to pay for the stock when you exercise the option, you forgo the “option premium” benefit of the stock option when you exercise early. If the stock is publicly traded, you could simply buy the stock on the stock market and continue to hold the options.
Making an early exercise of a stock option and making a Section 83(b) election or making a Section 83(b) election for a nonvested stock grant aren’t necessarily “no brainer” decisions. Carefully consider the risks before going ahead.
If we can help you in that process, please call Dawn Siemer on Monday or Wednesday through Friday at 408-918-3162 to make an appointment.
Some U.S. residents from Canada get tax relief.
U.S. residents who are participants in certain Canadian retirement plans are supposed to disregard the plan and report the income as it accrues inside the plan. Under a tax treaty, an election has been available to report the income when it is paid, like for a U.S. qualified retirement plan. The election was made on Form 8891. These accounts were also supposed to be reported as foreign accounts on IRS Forms 3920 and 8938.
Most U.S. residents from Canada who were participants in these accounts probably weren’t aware of these rules and haven’t complied with them.
The IRS just issued a Revenue Procedure liberalizing these rules.
As long as a taxpayer is an “eligible individual,” the income for the accounts can simply be reported consistently with how they would be reported for benefits from a U.S. qualified plan. This reporting will enable the taxpayer to claim a foreign tax credit for Canadian tax that applies to the same income that is reported on a U.S. income tax return. The accounts are also exempt from “foreign account” reporting on Form 3920.
An “eligible individual”
- Is or at any time was a U.S. citizen or resident while a beneficiary of the plan;
- Satisfied the requirements for filing a U.S. federal income tax return for each taxable year during which the individual was a U.S. citizen or resident;
- Has not reported as gross income on a U.S. federal income tax return the earnings that accrued in, but were not distributed by, the plan during any taxable year in which the individual was a U.S. citizen or resident; and
- Has not reported any and all distributions received from the plan as if the individual had made an election under Article XVIII(7) of the Convention (treaty) for all years during which the individual was a U.S. citizen or resident.
An individual who is not an “eligible individual” must continue to report under the current rules or apply for the consent of the Commissioner of Internal Revenue for a change of accounting method in accordance with the treaty.
Form 8891 is obsolete after 2014 and will be discontinued.
(Revenue Procedure 2014-55, October 7, 2014.)
Do you need help with amended income tax returns?
We have already been meeting with folks who want a second look at their 2013 income tax returns for possible corrections. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.
Does your group need a speaker?
We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, 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.
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+.
Correction of Financial Insider Weekly broadcast schedule for Morgan Hill
The broadcast time for Financial Insider Weekly in Morgan Hill is Mondays and Tuesdays at 7 p.m. (Pacific Time.) The show is broadcast in that community on cable channel 19 and broadcast on the internet at the same time as streaming video at www.mhat.tv.
Financial Insider Weekly broadcast schedule for October and November.
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 October and November:
- October 24, 2014, Michael Jones, CPA, Thompson Jones LLP, “Community property issues for retirement accounts”
- October 31, 2014, Michael Jones, CPA, Thompson Jones LLP, “Handling retirement accounts after a death”
- November 7 and 14, 2014, Cynthia Sue Larson, MBA, Life Coach, “How to manage emotions for financial decisions”
- November 21, 2014, Mari Ellen Loijens, Silicon Valley Community Foundation, “Why and how to promote charitable giving in your family”
- November 28, 2014, Tom Oviatt, Wymac Capital, Inc., “Reverse mortgage developments”
Financial Insider Weekly is also broadcast as follows:
- Sunday at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 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 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
- Tuesday at 10:30 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
- Tuesday 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 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
- 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
- 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
- Saturday 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
- Saturday at 1:00 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 email@example.com.
See the books mentioned at http://http://www.siliconvalleypublishingcompany.com/products/secrets-of-tax-planning-for-employee-stock-options-2014-editionor the Special Report, Nonqualified Stock Options – Executive Tax and Financial Planning Strategies at http://www.stockoptionadvisors.com/non-q_stock.
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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.
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.
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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)