Recommend Our Site to Your Friends!

Print This Page

By Michael Gray

Table of Contents

• House votes against accounting change for options.
• Tech companies grant fewer options.
• Extended income tax returns almost due!
• Questions and Answers
  • How should I prepare for taxes on stock options?
  • Are there any tax breaks I can get for worthless stock?
  • What is the difference between NOL and AMT NOL?
• Have you subscribed to Michael Gray, CPA's Tax and Business Insight?
• Consult with a tax advisor
• Subscribe to Michael Gray, CPA's Option Alert

House votes against accounting change for options

The U.S. House of Representatives overwhelmingly passed legislation that would block a new accounting rule by the Financial Accounting Standards Board (FASB) that would require reporting an expense on a company's income statement for options granted to employees. The vote in favor of the legislation was 312-111.

Senator Richard Shelby, chairperson of the Senate Banking Committee is blocking a Senate vote on the legislation. He is a staunch supporter of the FASB as the rulemaking body for the accounting profession.

Return to Table of Contents

Tech companies grant fewer options

Mellon Financial Corp. has said that high-tech companies have decreased the use of broad-based stock option grants by 15% to 20%. Financial commentators believe the decrease is a response to the new rule issued by the FASB requiring reporting an expense for granting the options. Other reasons fewer options are being granted are the weak job market in high technology enabling employers to pay new employees less, and the weak venture capital support of new ventures that typically grant employee stock options.

Return to Table of Contents

Extended income tax returns almost due!

The initial extension due date for calendar year individual income tax returns and gift tax returns is August 16, 2004. Only about two weeks to go!

Return to Table of Contents

---

Questions and Answers

Question

I am going to be offered 4,000 shares of company stock options at a price of $4.00 per share. The shares are granted after a year of service. 25% will be vested after another year and 25% each year after that.

The company is currently private, but is looking for an IPO around the middle of 2005. I have been employed here for one month.

What should be my plan of attack as far as preparing for taxes? When do I need to file a Section 83(b) election?

Answer

It's admirable that you're looking ahead, but any advice I give you would be premature. The consequences of your actions depend on the value of the stock when you exercise the options. Are the options ISOs or NQOs? Is early exercise permitted? If not, you may not need a Section 83(b) election. If so, the election must be made within 30 days after exercising the options. Consider consulting with a tax advisor about your personal situation when your options are actually granted and vest.

Question

I have been with a private company for 5 years. 4 years ago, I exercised $8,000 of options in a cashless exercise (on loan from the company at 7% interest). Those options have since suffered a 1000:1 reverse split! Now that I'm leaving the company (tomorrow!), I owe roughly $11,000 to pay off the loan for shares that are worth pennies.

My questions are:

1. Is there any way I can get out of paying this money?!!
   
   
2. Are there any tax breaks I could get (company is still private).

Answer

1. The note is a valid obligation. You do take a risk when you buy stock. If you could persuade the company to forgive the note, it will be taxable income to you.
   
   
2. Look into having the company redeem your stock or making a private sale to another employee. Then you can claim a capital loss (limited to capital gains plus $3,000).

Question

Do you have a good AMT NOL worksheet or something that spells out what the difference between NOL and AMT NOL is?

Answer

Sorry, I don't have such a spreadsheet. You compute AMT NOL like regular tax NOL, except items that don't apply for AMT will be excluded and items that apply for AMT will be added. For example, income will be added for an ISO exercise. Deductions for taxes, miscellaneous itemized deductions, the standard deduction and personal exemption allowances are eliminated for AMT. With these modifications, you can use the regular NOL worksheet. (Some tax return preparation software generates an AMT NOL schedule.) Remember the NOL deduction is limited for AMT; see Form 6251.

---

Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter.

Return to Table of Contents

Have you subscribed to Michael Gray, CPA's Tax and Business Insight?

This free email newsletter covers general tax and business issues. To see past issues and to subscribe, visit our web site at http://www.taxtrimmers.com.

Return to Table of Contents

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.

Return to Table of Contents

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.

Return to Table of Contents

(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.