Michael Gray, CPA’s Option Alert #132

An irregular alert for issues relating to employee stock options

April 27, 2015
© 2015 by Michael Gray, CPA
ISSN 1931-2768

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

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The Section 83(b) election and fully-vested stock

I have been getting a number of questions about whether a Section 83(b) election should be made when a taxpayer exercises a fully-vested employee stock option.

If a Section 83(b) election isn’t made for the exercise of an unvested option, ordinary income for the excess of the fair market value of the stock over the option price is taxable when the option vests. If a Section 83(b) election is made, the excess of the fair market value of the stock over the option price is taxable when the option is exercised.

The purpose of a Section 83(b) election is to disregard lapsing restrictions (“a substantial risk of forfeiture”) when a taxpayer receives property in connection with the performance of services. For employee stock options, the principal restriction we are concerned with is vesting. Employee trading blackouts are disregarded as restrictions for this purpose.

Therefore, a Section 83(b) election isn’t required when you exercise a fully-vested employee stock option.

Another restriction specifically covered by Section 83 is when the sale of property could subject the taxpayer to suit under Section 16(b) of the Securities Exchange Act of 1934. Corporate “insiders” subject to those rules should consult with their tax advisors about the details.

Remember that incentive stock options aren’t eligible for a Section 83(b) election for regular tax reporting, but are eligible for alternative minimum tax reporting. Employee stock purchase plans also aren’t eligible for a Section 83(b) election.

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$1 million compensation deduction limit can apply to stock- based compensation.

The IRS has issued final regulations for the $1 million compensation deduction limit for publicly-traded corporations.

The limitation applies to compensation paid to the chief executive or the four highest-paid officers that exceeds $1 million per year. It does not apply to compensation paid for attaining one or more performance goals.

Employee stock options and stock appreciation rights (SARs) can meet the “performance goal” exception provided the plan (which must be approved by the corporation’s shareholders) specifies the maximum number of shares for which options or SARs can be granted to any individual employee for a specified period, and if the compensation award is based solely on the increase in the stock’s value after the date of grant or award.

The regulations are effective for compensatory grants of stock options and stock appreciation rights on or after June 24, 2011, when proposed regulations were issued. They are effective to remuneration payable for restricted stock units granted on or after March 30, 2015 when the RSUs were granted before the corporation became publicly traded.

(T.D. 9716, March 30, 2015.)

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Call for your appointment to prepare your extended 2014 income tax returns

If you want us to prepare your 2014 income tax returns, please call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays for an appointment.

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Our books are now available for purchase online!

We recently launched a new website for Michael Gray’s publishing company, the Silicon Valley Publishing Company. You can buy our books on the website here: http://www.siliconvalleypublishingcompany.com.

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Dawn Siemer’s schedule changes

Dawn Siemer is our office manager. Her duties include making appointments for our firm. Starting this week, her schedule is changing to 9 a.m. to 5:30 p.m. Pacific Time on Mondays, Wednesdays and Fridays. Dawn’s direct telephone number is 408- 918-3162.

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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.

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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+.

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Financial Insider Weekly broadcast schedule for May and June.

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 May and June:

May 1, 2015, Professor Patricia Cain, Santa Clara University School of Law, “Tax developments for same-sex couples”
May 8 and 15, 2015, William J. Mitchell, CPA, “I’m being audited by the IRS! What should I do?”
May 22, 2015, William J. Mitchell, CPA, “What to do when you disagree with an IRS audit report”
May 29, 2015, Tom W. Anderson, President, Retirement Industry Trust Association, “Investing in real estate using a Roth or IRA account”
June 5, 2015, Tom W. Anderson, President, Retirement Industry Trust Association, “Making alternative investments besides real estate using a Roth or IRA account”
June 12 and 19, 2015, Don Pollard, CLU, ChFC, Advanced Professionals, “Health care plans for small businesses update”
June 26, 2015, Michael Desmarais, attorney at law, “Your rights as a beneficiary”

Financial Insider Weekly is also broadcast as follows:

  • Sunday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • 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 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
  • Monday 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
  • Monday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • 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

www.mhat.tv

  • 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
  • Thursday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • 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 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Saturday at 1:00 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 answer emails personally. He will answer selected questions in this newsletter. Email your questions to mgray@stockoptionadvisors.com.

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/isofaq/non-q_stock/.

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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.

I’m also on Facebook and Linked In. You can also follow me on other social media sites, www.facebook.com, www.linkedin.com/in/michaelgraycpa, and Google+.

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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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