Michael Gray, CPA’s Option Alert #160

An irregular alert for issues relating to employee stock options

October 17, 2017

© 2017 by Michael Gray, CPA

ISSN 1931-2768

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Northern California wildfire victims get filing relief

The IRS has announced that victims of Northern California wildfires who have extended the filing date for their 2016 income tax returns will receive an additional extension of time until January 31, 2018 to file their income tax returns. California automatically conforms to that postponement period.

The relief applies to:

  • Taxpayers located in the counties declared a presidential disaster area (Butte, Lake, Mendocino, Napa, Nevada, Sonoma and Yuba);
  • Firefighters and relief workers providing help in those disaster areas; and
  • Taxpayers whose tax return preparers are located in those disaster areas.

Taxpayers with an address of record with the IRS in a disaster area will automatically receive relief. Other qualifying taxpayers must contact the IRS at 866-562-5227 for relief. California taxpayers should call the Franchise Tax Board. Tax practitioners can call the Franchise Tax Board’s Practitioner Hotline at 916-845-7057.

The IRS is also waiving late deposit penalties for federal payroll and excise tax deposits normally due after October 8 and before October 23 provided the deposits are made by October 23.

Note that Orange County fire victims currently don’t qualify for this relief and will have to request penalty abatement for a reasonable cause if they file late.

(IR-2017-172, Revenue and Taxation Code Section 18572.)

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The year will soon be over. Will you be ready?

It’s time for year end tax planning. With the holidays, Michael Gray’s availability will be limited. Call Dawn Siemer weekday mornings at 408-918-3162 to schedule your year-end tax planning appointment now.

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Tax reform proposals make year end planning for employee stock options harder

We don’t know the details of what the tax reform legislation will look like, when it will pass or whether it will pass. The proposals include a balancing act of potentially lower tax rates for ordinary income (such as from exercising employee stock options), possibly repealing the alternative minimum tax (important for incentive stock options) and repealed deductions (such as for state income taxes). The effective dates for the changes also are unknown. The legislation could pass very late this year or early next year.

We’ll do the best we can to provide guidance with our broken crystal ball.

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IRS loses on determination of date of stock option exercise

The IRS audited James Powers’s 2007 and 2008 income tax returns, probably because he included Form 8919, Uncollected Social Security and Medicare Tax on Wages, with his 2007 income tax return, claiming his wages income reported on Form W-2 was in error. Mr. Powers also filed his 2008 income tax return late.

The IRS claimed Mr. Powers reported the income from exercising a nonqualified stock option for 4,000 shares of comScore stock in the wrong year. The IRS said the income was taxable in 2008, not 2007, based on when the shares showed up on the brokerage statement for Mr. Powers’s Morgan Stanley Smith Barney account.

The Tax Court ruled against the IRS. The Tax Court said the evidence indicated that the stock option was exercised in 2007. The evidence included the fact the employer reported the income on Mr. Powers’s Form W-2 for 2007 and didn’t report it on an information report for 2008, and email communication by Mr. Powers with his CPA at the time his 2007 income tax return was prepared explaining the income item on his Form W-2 and why it was in error.

(James A. Powers and Jennifer M. Scherer v. Commissioner, T.C. Memo. 2017-179, September 14, 2017.)

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Tax relief for donated sick and vacation pay

The IRS has announced tax relief for employees that forgo their sick pay, personal leave or vacation pay and elect that their employer pay those amounts directly to a charitable organization to aid victims of Hurricanes Maria, Irma and Harvey. The employee has no taxable wages for the foregone compensation and the employer may deduct the payments as business expenses. Employees benefit from reduced employment taxes and avoid the limitations for charitable contributions.

(Notices 2017-62, 2017-52 and 2017-48.)

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Republicans issue tax reform framework

The Trump Administration and the Republican leadership in Congress have released a framework for tax reform on September 27. The framework is still very sketchy. I have written an article, Are you a winner or a loser under tax reform? Here is the URL for the blog post: www.michaelgraycpa.com/posts/winner-loser-tax-reform

(Unified Framework for fixing our broken tax code.)

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Congress and President enact hurricane relief

Congress has passed and President Trump has signed legislation providing tax relief to victims of the recent hurricanes. Among other provisions, the Act allows qualified taxpayers to deduct personal casualty losses without regard to the 10% floor and allows the deduction to those who claim the standard deduction. The Act also waives the early distribution penalty for qualified taxpayers withdrawing funds from their retirement accounts. (Remember many states, including California, do not automatically conform to federal tax changes. So far, California hasn’t adopted these changes.)

(Disaster Relief Act of 2017.)

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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 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 visit AngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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Financial Insider Weekly past episodes

After eight years of production, I have discontinued producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Past episodes are available at https://www.youtube.com/user/financialinsiderweek.

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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 www.employeestockoptionsecrets.com or the Special Report, Nonqualified Stock Options – Executive Tax and Financial Planning Strategies at www.stockoptionadvisors.com/stock/nqso-faq/.

Follow me on Twitter, Facebook or LinkedIn!

If you enjoy Twitter, please follow me at www.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 and www.linkedin.com/in/michaelgraycpa.

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Check out my blog.

I have also started a blog at www.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.)