Michael Gray, CPA’s Option Alert #150
An irregular alert for issues relating to employee stock options
October 21, 2016
© 2016 by Michael Gray, CPA
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Table of Contents
- Attention employees with stock options! Michael Gray will give a LIVE lunchtime seminar on December 8
- House passes relief for some employees of private companies with stock options
- If you’re planning to leave your employer, don’t make a Section 83(b) election for ISOs
- Good news! QTIP election is accepted with a portability election
- James Gray “kickstarts” new version of Crazier Eights
- Does your group need a speaker?
- Please share your good experiences with Michael Gray, CPA
- Financial Insider Weekly broadcast schedule
- Follow me on social media!
- Check out my blog
- Interested in our other newsletters?
- Consult with a tax advisor
Attention employees with stock options! Michael Gray will give a LIVE lunchtime seminar on December 8
Michael Gray, CPA will give a lunchtime seminar on Thursday, December 8 for employees with stock options. The title of the seminar is “Executive Tax Planning For Employee Stock Options”. The investment is $97 per person, and includes a copy of the book by the same name. The seminar will be located at Luigi’s Pizza & Pasta, 2495 Winchester Blvd., in Campbell, California. Lunch is included. Reservations are required and there is limited seating. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays no later than December 6. Here is a link to more information: www.stockoptionadvisors.com/notwp/seminar16-12-8.pdf.
House passes relief for some employees of private companies with stock compensation
The House of Representatives has passed HR 5719, the Empowering Employees through Stock Ownership bill, introduced by Ways and Means Oversight Subcommittee Chairman Peter Roskam R-Ill and Rep. Joseph Crowley, D-N.Y. The legislation still has to be passed by the Senate and approved by President Obama to become law. If passed, it is proposed to be effective for stock attributable to option exercises or restricted stock units settled after December 31, 2016.
The legislation would make an election available to postpone reporting the income from the vesting of a restricted stock unit or exercise of a stock option, including a purchase with an employee stock purchase plan or exercise of an incentive stock option, for up to seven years when the stock isn’t publicly traded or eligible for an employer buy-back. If the stock is purchased or becomes publicly traded before that date, the income would be accelerated to that date. If the employee becomes ineligible for the election, as explained below, the income will be accelerated to the date the employee becomes ineligible. If the employer offers to repurchase the stock, the income will also be accelerated.
The deferral election would have to be made within 30 days after the option is exercised or the stock becomes vested, whichever is later. The corporation would be required to notify the stock recipient of its eligibility to make the election.
If a taxpayer makes the election for stock received under an employee stock purchase plan or an incentive stock option, it will be treated as a non-qualified stock option and not eligible for the tax treatment of qualified employee stock option plans. That means the income will be subject to income tax withholding and employment taxes, including Social Security and Medicare withholding, and the income (determined at the date of exercise or vesting of a grant) will not be eligible for long-term capital gain treatment.
If an employee makes a Section 83(b) election to treat the transaction as taxable on the date of exercise, that stock won’t be eligible for the deferral election.
If an employer purchased stock received from an employee stock option or RSU during the previous calendar year, the stock of that corporation won’t be eligible for the deferral election.
Certain employees wouldn’t be eligible to make the election, including:
- a taxpayer who was a 1-percent owner at any time during the 10 preceding calendar years;
- the chief executive officer of the corporation or anyone acting in that capacity at any time during the 10 preceding calendar years;
- the chief financial officer of the corporation or anyone acting in that capacity during the 10 preceding calendar years;
- certain persons who are related to the above-described taxpayers;
- The four highest compensated officers of the corporation during any of the 10 preceding taxable years.
Employees who make the election will be required to pay income and employment tax withholding to the employer when the income becomes taxable. Federal income tax withholding will be at the maximum federal tax rate.
Note the income isn’t limited to the gain at the time the income becomes taxable. It will still be the amount at the exercise or vesting date. For example, if a share of stock vested under an RSU had a fair market value of $100 per share and the fair market value when the stock becomes publicly traded is $50 per share, the taxable income would be $100 per share.
Working with private company stock is one of the toughest problems for equity-based compensation – especially when an employee is going to leave a company. This election, although not ideal, will be a valuable alternative if it is enacted.
If you’re planning to leave your employer, don’t make a Section 83(b) election for ISOs
One of our readers asked for our guidance to his tax return preparer.
He made an early exercise of incentive stock options during 2014, but left his employer early in 2015. None of the stock was vested and he forfeited all shares back to the employer.
No Section 83(b) election was made.
Since the employer (correctly) issued Form 3921 for the exercise of the incentive stock options during 2014, the tax return preparer believed that the exercise had to be reported as income on the alternative minimum tax form (Form 6251) for 2014.
I pointed out to the preparer that, according to Internal Revenue Code Section 56(b)(3), the rules for incentive stock options under Internal Revenue Code Section 422 don’t apply for the alternative minimum tax. That means the rules for nonqualified stock options under Section 83 apply to incentive stock options for AMT reporting.
Since no Section 83(b) election was made, taxable income is reported based on the excess of the fair market value over the option price as the shares vest.
In this case, the shares never vested, so there was no taxable income for AMT reporting for 2014.
To make the situation clear for the tax return preparer and the IRS, I prepared a footnote disclosure for the taxpayer’s income tax return. However, since this treatment is dictated by the Internal Revenue Code, no disclosure is really required.
If a Section 83(b) election was made, the shares would have been treated “as if” they were vested for AMT reporting, which would have resulted in a big tax.
Think carefully before making the election, especially if it seems likely you will soon be leaving your employer and will have to forfeit shares.
If your tax return preparer reported AMT income for an early exercise of ISOs and you didn’t make a Section 83(b) election, maybe we can help you amend your tax return and claim a refund. Call Dawn Siemer for an appointment at 408-918-3162.
Good news! QTIP election is accepted with a portability election.
In the past, the IRS has said a QTIP (qualified terminable interest property) election wasn’t effective unless making the election resulted in a lower federal estate tax. After that announcement, Congress enacted a portability election to enable a surviving spouse to receive the unused lifetime estate and gift tax exemption of a deceased spouse.
When a QTIP election is made for a qualified trust, the trust property qualifies for the estate and tax marital exemption and the trust property is included in the taxable estate of the surviving spouse. That also means the tax basis of the property in the QTIP trust receives a new tax basis (cost to determine gains and losses for income tax reporting) at the death of the surviving spouse.
Now the IRS has announced the QTIP election can be made when there is no tax reduction as a result of a portability election. A QTIP election will only be voided if an executor requests that it be voided.
This is complex stuff, but worth discussing with your attorney whether your estate plan should be updated.
(Revenue Procedure 2016-49.)
James Gray “kickstarts” new version of Crazier Eights.
James Gray, who is my son, has created a marvelous family card game, called Crazier Eights. He invented it because family members like my wife, Janet, and me were too intimidated to play Magic The Gathering with him. The basic concept of the game is similar to crazy eights or Uno, and the cards have special abilities and are decorated with terrific artwork. These days it seems everyone is walking around with their noses in their smart phones. Crazier Eights is a game with some social interaction.
Now James is introducing a new Camelot edition of Crazier Eights, and has initiated a Kickstarter to finance his startup costs. As a contributer to the kickstarter, you can get a copy of the game and other bonuses. Here is a link for the Kickstarter web site – tinyurl.com/craziercamelot. I hope you’ll visit the site to learn more.
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 and siliconvalley.citysearch.com.
We use Angie’s List to assess whether we’re doing a good job keeping valued customers like you happy. Please visitAngiesList.com/Review/4258970 in order to grade our quality of work and customer service.
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 21 and 28, Nancy Ross, Bauer Shepherd & Ross and Associates, “How a collaborative approach can make a divorce a less painful process”
- November 4, Robert E. Temmerman, Jr., Esq., Temmerman, Cilley & Kohlmann, LLP, “I’m an executor! Now what?”
- November 11, Robert E. Temmerman, Jr., Esq., Temmerman, Cilley & Kohlmann, LLP, “I’m a trustee! Now what?”
- November 18 and 25, Rebecca Dupras, Esq., Silicon Valley Community Foundation, “Why and how to promote charitable giving in your family”
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
- 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
Broadcast on the internet at the same time as streaming video at www.mhat.tv
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 www.employeestockoptionsecrets.com or the Special Report, Nonqualified Stock Options – Executive Tax and Financial Planning Strategies at www.stockoptionadvisors.com/non-q_stock.shtml.
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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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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)