Michael Gray, CPA’s Option Alert #168
An irregular alert for issues relating to employee stock options
May 7, 2018
© 2018 by Michael Gray, CPA
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Table of Contents
- It’s time for cleanup and extensions.
- Why planning for employee stock options is even more important this year.
- Be careful when modifying the terms of an incentive stock option.
- Accelerated vesting isn’t a modification of an ISO.
- Please share your good experiences with Michael Gray, CPA
- Financial Insider Weekly past episodes
- Follow me on social media!
- Check out my blog
- Interested in our other newsletters?
- Consult with a tax advisor
It’s time for cleanup and extensions.
Maybe you have an issue for which you would like a second look on the income tax returns you just filed. Maybe you have extended income tax returns that you need to have prepared. Or maybe you have some planning issues for which need advice. To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.
Why planning for employee stock options is even more important this year.
The Tax Cuts and Jobs Act of 2017 that was enacted on December 22, 2017 really is the most significant tax legislation since 1986. The tax picture has changed significantly. For example, the alternative minimum tax exemption was increased, which means that many exercises of incentive stock options will no longer trigger that tax. Miscellaneous itemized deductions formerly subject to the 2% of adjusted gross income floor were repealed. The deduction for state income taxes plus real estate taxes is limited to $10,000 for the regular tax computation. Since 2% miscellaneous itemized deductions and the itemized deduction for taxes also aren’t deductible for the alternative minimum tax, these changes will also impact tax planning for the alternative minimum tax and recovery of the minimum tax credit.
There is also an important new election available to defer the tax when exercising certain employee stock options for stock that isn’t publicly traded.
Get some good tax projections using software that includes the tax law changes. You’ll be glad you did!
Be careful when modifying the terms of an incentive stock option.
Sometimes events happen where an employer wants to extend the term of an incentive stock option, such as an incentive to keep a key employee.
Such an extension can have disastrous consequences.
According to Internal Revenue Code Section 424(h), the modification, including an extension, of an incentive stock option is considered the grant of a new option. If the option price isn’t changed to the fair market value on the date of the extension, the option probably won’t qualify as an incentive stock option (Internal Revenue Code Section 422(b)(4)). The option will also probably violate the option pricing rules under Internal Revenue Code Section 409A, resulting in severe penalty taxes for the employee!
Look before you leap!
Accelerated vesting isn’t a modification of an ISO.
According to Internal Revenue Code Section 424(h)(3)(C), the accelerated vesting of ISOs isn’t a modification.
This is helpful, since many companies accelerate the vesting of ISOs if the company is acquired.
However, if the option price of ISOs that are initially exercisable for the year exceeds $100,000, some of the ISOs will be converted to non-qualified stock options (NQSOs). (Internal Revenue Code Section 422(d).) The exercise of the NQSOs will result in ordinary compensation income, subject to withholding and employment taxes.
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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.
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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Do you know about our other newsletters?
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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.)