Michael Gray, CPA’s Option Alert #182
An irregular alert for issues relating to employee stock options
November 7, 2018
© 2018 by Michael Gray, CPA
(If you find this information valuable, please pass it on to a colleague!)
If you would like to subscribe or remove yourself from our
newsletter, please fill out our form at
www.stockoptionadvisors.com. You can also remove
yourself by clicking the link at the bottom of this message.
Table of Contents
- To our readers – Thanks and notice
- Attention, CPAs! Would you like to write this newsletter?
- Attention, CPA’s! Let’s keep in touch
- The year will soon be over. Will you be ready?
- New election codes for 2018 Form W-2
- Proposed regulations issued for Qualified Opportunity Funds
- If you exercised ISOs during 2018, should you use the “escape hatch”?
- Year end planning – should you “harvest” losses before the year end?
- Federal disaster areas.
- Be sure your online tax payments are processed!
- 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
To our readers – Thanks and notice.
After more than 14 years, I am discontinuing writing this newsletter. I hope you have found it valuable. I will continue covering tax developments for employee stock options in my email newsletter, Michael Gray, CPA’s Tax and Business Insight. To subscribe to that newsletter, go to www.taxtrimmers.com and use the Subscribe box at the top of the page.
Attention, CPAs! Would you like to write this newsletter?
Writing this newsletter is a great way to promote your tax practice for employee stock option holders. There is also a companion website at www.stockoptionadvisors.com. If you would like to pursue a licensing agreement with Michael Gray, please call him at 408-918-3161. (Note Michael Gray will not be available until Monday, November 12.)
Attention, CPAs! Let’s keep in touch.
I intend to offer information that CPAs will find valuable. Please send your contact information to email@example.com.
The year will soon be over. Will you be ready?
It’s time for year end tax planning. With the holidays, Thi Nguyen’s availability will be limited. Call her at 408-286-7400, extension 206 to schedule your year-end tax planning appointment now.
New election codes for 2018 Form W-2.
The Tax Cuts and Jobs Act of 2017, enacted December 20, 2017, includes a new election to defer reporting taxable income from the exercise of an employee stock option or from an employee stock grant of certain companies whose stock isn’t publicly traded for up to five years. The IRS has created two new codes for Box 12 of 2018 Form W-2 relating to this election. Code GG is for for the amount of taxable income relating to these grants under Internal Revenue Code Section 83(i). Code HH is for aggregate deferals unde Section 83(i) elections as of the close of the calendar year.
(Note the IRS still hasn’t issued regulations or a revenue procedure for the form of the Section 83(i) election. The election must be made within 30 days after the first date the employee’s right to the stock is substantially vested or transferable, whichever is earlier. Employees should modify the Section 83(b) election format for this election. See your tax advisor for help making the election.)
Employers should assure that this information is reported on Form W-2 for their employees for 2018.
(Revenue Procedure 2018-37, July 12, 2018, 2018 Form W-2.)
Proposed regulations issued for Qualified Opportunity Funds.
The IRS has issued proposed regulations for Qualified Opportunity Funds. A new tax benefit was enacted in the Tax Cuts and Jobs Act of 2017. Taxpayers who invest capital gains within 180 days into a Qualified Opportunity Zone investment can defer federal income tax on the gain for up to eight years, and if the investment is held for at least ten years, any additional gain relating to the appreciation of the investment may be tax free. I have written a summary about this. Here is a URL to see that summary. www.michaelgraycpa.com/posts/opportunity-zones-a-new-secret-tax-benefit/
The IRS also issued a Revenue Ruling relating to the rehabilitation of an existing building located in an Opportunity Zone and the qualification of the land as Zone Business Property.
Remember California has not adopted these rules, so no deferral or exclusion applies for California tax reporting.
(Proposed Regulations REG-115420-18, October 19, 2018. Rev Rul 2018-29.)
If you exercised ISOs during 2018, should you use the “escape hatch”?
Remember if you exercised ISOs during 2018 and didn’t sell the stock, your AMT adjustment will be based on the fair market value of the stock on the date of exercise. However, if you sell the stock before the end of the year of exercise, the AMT adjustment is eliminated. Ordinary income is reported for the excess of the selling price over the option price. I call this strategy “the escape hatch.”
For example, Jean Employee exercised an ISO for 1,000 shares of XYZ stock on March 1, 2018. The fair market value of the shares on March 1, 2018 was $55 per share and the option price was $5 per share. If Jean didn’t sell the stock, she would report additional AMT income of $55 – $5 = $50 X 1,000 shares = $50,000. On December 15, 2018, Jean sells the stock for $15 per share. The AMT adjustment is eliminated and Jean reports $15 – $5 = $10 X 1,000 shares = $10,000 of ordinary income for regular tax and AMT.
There is an important requirement to get this tax benefit. A loss would have to be “allowable” if the stock was sold at a loss. A common transaction that would disqualify an escape hatch is a wash sale. A wash sale happens when replacement shares or an option to acquire replacement shares are acquired during the period 30 days before or 30 days after the sale.
For example, if Jean purchased 1,000 shares of XYZ Software for $16 per share on December 10, 2018, she would still have a disqualifying disposition of the ISO shares, but she would have $50,000 of ordinary income because the escape hatch wouldn’t apply. Her short-term capital loss of $15 – $55 = $40 X 1,000 shares = $40,000 would be disallowed as a current deduction. The disallowed loss would be added to the tax basis of the replacement shares. Therefore, the tax basis of the replacement shares would be $16 + $40 = $56 X 1,000 shares = $56,000.
If you are going to use this “escape hatch” strategy, I suggest not waiting until the last minute. One of my clients was thinking of doing this, and an employee unexpectedly sued the company for an employment-related matter. The company’s stock was locked up for employees because of the lawsuit. My client wasn’t able to use the “escape hatch” strategy.
Year end planning – should you “harvest” losses before the year end?
The stock market has been very active this year. If you have sold securities (or other assets) for capital gains, review the securities (or other assets) you are holding for potential capital losses. If you sell the loss shares before the end of the year, you can offset the losses against your gains. This is even more important if you could be subject to the 3.8% federal net investment income tax. You could bring your adjusted gross income below the $250,000 threshold for married persons filing joint returns or $200,000 for singles.
Remember the wash sale rules. If you purchase shares of the same security during the period 30 days before and 30 days after a sale at a loss, the loss is disallowed for the same number of shares.
Federal disaster areas.
Under the Tax Cuts and Jobs Act of 2017 enacted December 2017, casualty losses can only be claimed for losses in declared Federal disaster areas. There are many of them for 2018. You can consult with a tax advisor to find out if you qualify, or try searching online. In California, fires at Lake and Shasta Counties that began July 23, 2018 are a declared Federal disaster. If you experienced a loss in a Federal disaster area, you should consult with a tax advisor now. You might want to claim the loss on an amended 2017 federal income tax return.
There are filing and payment due date extensions available for taxpayers located in a Federal disaster area.
Be sure your online tax payments are processed!
The California Office of Tax Appeals has denied reasonable cause abatement claims of two taxpayers, who submitted large tax payments electronically. The tax payments weren’t processed, and the taxpayers didn’t notice.
In one of the cases, the taxpayers didn’t realize they were looking at a “payment review page” and didn’t press the button to process the payment. The OTA said a prudent taxpayer would have notice that a $200,000 tax payment wasn’t deducted from his or her account.
In another case, the taxpayer was relying on its tax return preparer to process an extension payment. The OTA said the payment of the tax was not an obligation that could be delegated.
The lesson? Don’t wait until the last minute to make electronic payments. Make them well in advance and check your bank account to be sure they are processed.
(Appeal of Friedman, 2018-OTA-077 and Appeal of Donahoe, 2018-OTA-074.)
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 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. Back episodes 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.
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.
Check out my blog.
I have also started a blog at www.michaelgraycpa.com. Check it out!
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 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.
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.
(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)