Recommend Our Site to Your Friends!

Print This Page

By Michael Gray

A note about the World Trade Center disaster

My condolences to any of our readers who had a friend or family member who died or was injured in the attack.

The situation is unreal. This is a wake up call to the USA. Sadly, there are many people who don't like us, for whatever reasons. With this attack on the U.S. mainland, our lives have been changed, forever. The tradeoff for more security is less freedom.

It appears this is going to be a very long campaign that will probably try the patience of the American public. Like the War On Drugs, I'm afraid the War On Terrorism will never be won or concluded.

Let us pray for safety, wisdom and guidance for our national leaders, our citizens, and our military.

Extension granted for September 17, 2001 due date

In view of the September 11 attack on the United States, the IRS has granted a blanket one-week extension for tax returns and payments due on September 17, 2001 to September 24, 2001. If you didn't get your information or cash together in time for the third quarter estimated tax payment, you still have a little more time.

About the stock market

For what it's worth, fortunes were made during the Great Depression by people who bought the stock of surviving companies for cheap prices. Cash is king during a market downturn. Who knows when the market will hit the bottom? We're in for a rough ride for a while.

ESPP Trap Reminder

Remember there is no "escape hatch" for stock received through an employee stock purchase plan like there is for ISOs. This means that when shares are sold that haven't met the holding period requirements and the stock price has declined since the stock purchase, the employee will report ordinary income and a capital loss that is limited to capital gains plus $3,000.

Also remember the holding period requirements for ESPP shares are the same as for ISOs. The shares must be held more than one year after the stock purchase and more than two years after the grant date to qualify for long-term capital gain treatment. (For a qualified disposition, ordinary income is reported for the lesser of (1) the fair market value of the stock on the grant date over the option price determined on the grant date or (2) the excess of the fair market value on the date of disposition over the option price paid.)

For example, Jane Employee purchased 1,000 shares of Supercorp through her employee stock purchase plan on January 10, 20X1. The ESPP grant date was February 10, 20X0. The ESPP price was $10 per share and the fair market value on the date of purchase was $50 per share. On September 10, 20X1, Jane sells the shares for $20 per share. Jane must report additional compensation income of 1,000 shares X ($50 - $10) = $40,000. The basis of the shares is adjusted for the ordinary income to $10 original cost + $40 per share ordinary income = $50 per share. Jane must report a short-term capital loss for the sale of the shares of 1,000 shares X ($20 - $50) = ($30,000). Unless Jane has capital gains to offset the loss, her loss will be limited to $3,000 for 20X1, and the excess will be carried over to 20X2. In that case, even though Jane's net gain was actually 1,000 X ($20 - $10) = $10,000, her taxable income will be $40,000 - $3,000 = $37,000.

Unless you are afraid the stock will decline even more and possibly become worthless, it's probably best to wait until the holding period requirements are met before selling them.

Another Tax Trap reminder for NQOs

Remember the federal income tax withholding at the exercise of an NQO is at the "bonus" rate, currently 27.5%. Many people who exercise non-qualified options are surprised to learn they owe more income taxes on April 15 following the year of exercise because they are in a higher tax bracket.

Don't be one of them.

IRS Circular 230 Disclosure:

As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

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. We intend to eventually publish a directory of ESOAA members who are committed to helping clients with employee stock option issues.

Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.

(Michael Gray is the co-author of Employee Stock Options – A Strategic Planning Guide for the 21st Century Optionaire. You can order the book at http://www.amazon.com or http://www.barnesandnoble.com/ or buy it at Stacey’s Books.)

P.S.

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.