Tax Myths and Facts-July 2016

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TAX MYTHS AND FACTS Andrew Schwartz, Computershare

Transcript of Tax Myths and Facts-July 2016

Page 1: Tax Myths and Facts-July 2016

TAX MYTHS

AND FACTS

Andrew Schwartz, Computershare

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Disclaimer

The following presentation and the views expressed by the presenter are notintended to provide legal, tax, accounting or other professional advice. Theinformation contained in this presentation is general in nature and based onauthorities that are subject to change. Applicability to specific situations shouldbe determined through consultation with your legal and/or tax advisor.

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Agenda

› Reasons for complexity of taxation

› NQ and ISO options

› Restricted stock awards & units

› Employee stock purchase plans

› Tax reporting

› Audience questions

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Reasons for tax complexity

› Internal Revenue Code favors long-term employee investment

› ESPPs are called “options”

› Processes modernized after IRC sections finalized

› Ordinary income and capital gain/loss, often the same day

› IRS failure to acknowledge participant confusion

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Myth: Income from disqualifying dispositions is always the FMV of the stock on exercise date, less the exercise price

ISOs

Fact: The income from disqualifying dispositions will depend on the sale price of the underlying shares

- Example: ISO grant price $15, FMV at exercise $40

- 1) If stock sold at $40 or greater, DDT income is $25

- 2) If stock sold between $15 and $40, DDT income is (sales price – grant price)

- 3) If stock sold for less than $15, no DDT income

› Not subject to Federal or FICA withholding

› Not the same calculation as ESPPs!

Source: IRC§422(c)(2)(B), 421(a)(1)

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Myth: A Form 3921 for an ISO exercise is due when the shares are transferred or sold

ISOs

Fact: A Form 3921 is due for the year when the ISO is exercised

› Responsibility of issuer

› Form contains information necessary to calculate either a qualifying or disqualifying disposition

› Some companies may not track dispositions after exercise

- Participant would calculate any ordinary income and add as “other income” on Form 1040

› Not the same deadline as for ESPPs!

Source: IRC §6039(a)(1)

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Myth: By transferring an non-qualified option to someone else, a participant can avoid recognizing income

NQs

Fact: The income and withholding taxes are credited to the employee

› The option was earned by the employee, so the taxes apply to the employee

› Not the same treatment as beneficiary exercises upon death

Source: Rev. Rul. 67-267

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Myth: A participant who makes an 83(b) election and does not end up vesting in the stock can get a refund or deduction for loss

Restricted stock

Fact: Taxes paid under an 83(b) election are not refundable, no deduction for loss

› 83(b) election within 30 days of the grant

› No longer have to include a copy with return

› Recognize income based on value of stock at grant date

› Pay associated withholding taxes

› Same rule applies if value of stock at vesting is less than value at grant date

Source: IRC §83(b)(1)(B), Treas. Reg §1.83-2(b)(2) (no income deduction for unvested)

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Myth: The income recognition date is the same for restricted stock awards and restricted stock units

Restricted stock

Fact: Restricted stock is taxable at vesting, units at delivery

› Restricted stock becomes transferred to the employee on vesting date

› Units must first be converted into stock, delivery date is when the property is taxable

› FICA taxable at vesting, income taxes at delivery

› May be possible to defer payment of FICA taxes

› Industry practice seems to like vesting date

Source: IRC §83, 451

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Myth: Directors who vest in stock have income reported on Form W-2 and withholding can be elected

Restricted stock

Fact: Income is reported on Form 1099-MISC and no withholding is allowed

› Directors should make estimated federal and state tax payments

Source: 2016 Instructions for Form 1099-MISC, p.1

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Myth: Employees who are “retirement eligible” are liable for all taxes on unvested restricted stock units once they reach that date

Restricted stock units

Fact: FICA taxes are usually due at retirement eligibility date, income taxes at delivery

› Applies when there is a non-forfeitable right to receive the award

› Difficulties with paying taxes using share withholding

- Circular calculation

› Restricted stock – all taxes due at retirement eligibility date

- No longer “substantial risk of forfeiture”

› May be possible to defer payment of FICA taxes

Source: IRC Sections 83, 451

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Myth: Dividends on unvested restricted stock, or dividend equivalents, are reported on Form 1099-DIV

Restricted stock

Fact: Dividends on unvested stock are reported as compensation on Form W-2 or 1099-MISC

› Exception: If restricted stock awards were elected to be taxed under 83(b), dividends reported on Form 1099-DIV

› No 83(b) elections allowed on RSUs

Source: IRS Publication 525 (2015), p.14 (dividends received on restricted stock)

Rev. Proc. 2012-29 (Section 83(b) election format)

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Myth: Tax withholding over $100,000 for any one day can be paid the day after settlement of the shares sold for taxes

Restricted stock

Fact: Tax withholding over $100,000 is due the following business day

› IRS Field Directive

› Exception: Cashless exercises of stock options

› Source: IRS Chief Counsel Memorandum, March 14, 2003, Field Directive on Assertion of the Penalty for Failure toDeposit Employment Taxes

› https://www.irs.gov/Businesses/Assertion-of-the-Penalty-for-Failure-to-Deposit-Employment-Taxes

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Myth: Shares withheld for taxes never have to be reported by the company on Form 1099-B

Share Withholding

Fact: The company may have to report the value of shares withheld

› RSAs vs. RSUs

› “Regularly redeems its own stock”

› Tendering shares for taxes vs. share withholding

Source: Treasury Reg. §1.6045-1(a)(1)

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Myth: Revenue Procedure 2002-50 can exempt all employee equity plans from 1099-B reporting

1099-B Exemption

Fact: Only applies in specific circumstances

› Stock options

› FMV = Sales Price

› Broker fees

› Instructions on how to report sale

Source: Revenue Procedure 2002-50

https://www.irs.gov/pub/irs-drop/rp-02-50.pdf

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W-8BEN and W-9 issues

Myth: U.S. persons living overseas complete a W-8BEN form to certify their tax status

Fact: U.S. persons always complete a W-9, which remains valid indefinitely

Source: Form W-9 (Rev. December 2014)

Myth: Form W-8BEN remains valid indefinitely

Fact: Form W-8BEN is only valid until December 31, 3 years after the year of certification, or until the individual moves

Source: Instructions for Form W-8BEN (Rev. February 2014)

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W-8BEN and W-9 issues

Myth: Non-U.S. persons working in the U.S. complete a W-8BEN based on their citizenship

Fact: Non-U.S. citizens who have a green card in the U.S. complete a W-9 using their Social Security numbers

Myth: Non-U.S. persons working outside the U.S. complete a W-9 based on the head office location or where the stock is traded

Fact: Non-U.S. citizens who work outside of the U.S. complete a W-8BEN

Source: Instructions for the Requester of Forms W–8BEN, W–8BEN–E, W–8ECI, W–8EXP, and W–8IMY (Rev. July 2014)

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Myth: Options exercised by beneficiaries are not subject to any tax withholding

Death issues

Fact: It depends whether the options are exercised in the year of death

› In the calendar year of death:

- FICA (Social Security and Medicare withholding)

- Reported on decedent’s final W-2

- No other withholding

› After the calendar year of death:

- No withholding applies

› Income attributed to beneficiary

› 1099-MISC

Source: 2016 General Instructions for Form W-2, Deceased Employee’s Wages, p.8

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Myth: No income is recognized upon death of an ESPP participant

Death issues

Fact: ESPP shares are considered disposed of at death in a qualifying disposition

› Lesser of:

- (FMV at death – discounted purchase price)* # of shares in the lot, or

- (Price at beginning of offering period * discount %)* # of shares in the lot

But not less than zero

› No withholding

› Qualifying income reported on final W-2

Source: IRC§ 421(c), 423 (c), 424 (c), Treas. Reg §1.423-2(k)(2)

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Myth: Form 3922 is always mailed based on the year the shares were purchased

ESPPs

Fact: “First transfer of legal title” will differ depending on admin system

› ESPP administered by broker

- Shares created from reserve, first transfer = purchase date

- Open market purchases, first transfer = sale date or third-party transfer

› ESPP administered by transfer agent

- Shares held in common stock positions along with others

- First transfer = sale date or transfer to a broker

› 6039 regulations contemplate legends on certificates

- Process obsolete

- Dematerialization

Source: Treas. Reg. §1.6039-1

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Myth: Qualifying disposition income does not have to be tracked or reported by the company

ESPPs

Fact: Qualifying disposition income should be reported on Form W-2 in the year of disposition

› No withholding applies

› Not deductible as compensation expense on the company’s tax return

› May require annual surveys of employees to determine when shares sold

› Terminated employees have to be added back to payroll

Source: IRC §423(c)

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Myth: If a corporate action occurs, just adjust the purchase price based on the cost basis allocation information

ESPPs

Fact: Aside from the purchase price, the FMVs at the beginning and end of the offering period also have to be adjusted.

Example:

FMV at beginning of offering period $40

FMV at end of offering period $50

Discount: 15% with look-back

Purchase price $34

After 2:1 stock split:

FMV at beginning of offering period $20

FMV at end of offering period $25

Purchase price $17

����for every lot purchased in the plan

Source: IRC §307(a), 305(a) (non-taxable distributions)

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Spin-off example

ESPPs

Before: Old Co.

BUY 1/2/X1 10 shares @ $50 $ 500

BUY 2/1/X1 20 shares @ $40 $ 800

BUY 6/1/X1 20 shares @ $10 $ 200

50 shares $1500

Issuer declares spin-off of New Co., 1 share of New Co. per 2 shares of Old Co. Record date 3/20/X3, payable date 4/15/X3. 60% of basis allocated to Old Co., 40% to New Co.

After: Old Co. After: New Co.

BUY 1/2/X1 10 shares @ $30 $ 300 1/2/X1 5 shares @ $40 $ 200

BUY 2/1/X1 20 shares @ $24 $ 480 2/1/X1 10 shares @ $32 $ 320

BUY 6/1/X1 20 shares @ $ 6 $ 120 6/1/X1 10 shares @ $ 8 $ 80

50 shares $ 900 25 shares $ 600

$1500

Source: IRC §307(a), 305(a) (non-taxable distributions)

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Reporting example

Fact: It is confusing, and very easy to overpay taxes!

› IRS mandated cost basis reporting

› Special rules for employee equity awards

› Only cash paid is reported on 1099-B as cost basis

- Actual cost basis = cash paid + income recognized

› No indicator on front of Form 1099-B alerting employee

Source: IRC §6045A

Myth: Reporting equity compensation on a personal tax return is straightforward

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Nonqualified Stock Option Example

Exercise/Sale Date: February 15, 2015

Quantity: 100 options for shares in ABC Co.

FMV on exercise date: $37/share

Exercise Price: $30/share

Fees & commissions: $50

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2015 Tax Reporting

› W-2

- $700 Federal Earnings 100*($37 - $30)

- Fed/Soc Security/Medicare/State withholding

› 1099-B

- $3,650 net sale proceeds

- $3,000 reported cost basis ($3,700 actual cost basis)

- $50 capital loss ($3,650 - $3,700)

Nonqualified stock option

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2015 1099-BNonqualified stock option

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A

100 shares ABC Company

02/15/2015 2/15/2015

3,650 3,000

XX

X

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2015 1099-B Instructions

Box 1e. Shows the cost or other basis of securities sold. If the securitieswere acquired through the exercise of a non-compensatory option grantedor acquired on or after January 1, 2014, the basis has been adjusted toreflect your option premium. If the securities were acquired through theexercise of a non-compensatory option granted or acquired before January1, 2014, your broker is permitted, but not required, to adjust the basis toreflect your option premium.

If box 5 is checked, box 1e may be blank. See the Instructionsfor Form 8949, Instructions for Schedule D, or Pub. 550 for details.

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Form 8949

Nonqualified stock option

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Form 1040, Schedule D

Nonqualified stock option

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Q & A

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Contact information

Andrew Schwartz, CPA, CEP

Senior Manager, US Plan Managers

(201) 680-3340

[email protected]