Year-End Planning: Tax Strategies for Employee Stock Options

Stock options can be complex and costly if you don’t properly plan for taxes. Two common forms of non-cash employee incentives are Incentive Stock Options (ISOs) and Non-qualified Stock Options (NSOs). With tax reform on the horizon, hopefully this post will help you make a more informed decision about the opportunities that exist before the end of the year.

Incentive stock options: ISO’s are qualified stock options granted to an employee that allow the employee to buy stock or ownership in the employer at a specified price. Many ISO grants have vesting schedules that need to be met as a condition of receiving the options. With ISOs, there are no regular income tax consequences when granted or exercised. A taxable event does, however, occur if/when the employee sells the stock at a gain.

An ISO has certain requirements that must be met. For example, the option price cannot be less than the market value of the stock at the time of the grant, it must be exercised within ten years from the time of grant, and the market value of the stock for any ISOs exercisable in any year is limited to $100,000.

To avoid disqualified dispositions and lock in favorable capital gain treatment, ISO’s generally can’t be disposed of within two years after the option is granted or one year after the stock is transferred to the employee.

If there is a disqualifying disposition of a share of stock, you would recognize ordinary compensation income equal to the “bargain element”. This bargain element is the fair market value (FMV) of the stock on the date of sale less the exercise price.

For Alternative Minimum Tax (AMT) purposes, when an ISO is exercised, assuming the stock is fully vested on the exercise date, the amount of the bargain element is included as an adjustment for alternative minimum taxable income. If the stock is not substantially vested in the year of exercise (still subject to forfeiture), income is includible under the Code Sec. 83 rules for AMT purposes. In future years, a tax credit may be allowed against regular tax for AMT paid on account of the adjustment for ISO exercises.

Launch Consulting Insight: Since the Republican plan for tax reform has called for the AMT to be repealed, it may be worth holding off on exercising ISOs until 2018, if the current tax bill is passed.

Nonqualified stock options: NSOs, are taxable similar to an employee receiving compensation income equal to the FMV of the option. If a NSO isn’t tradeable and has no “ascertainable market value”, a taxable event would occur when stock is received upon exercise of the options rather than at the time of option receipt. The taxable amount would be the “bargain element”, the difference between the stock’s market price on the date of option exercise, less the exercise price under the option.

Launch Consulting Insight: NSOs pose a more difficult dilemma with year-end planning. If you have NSOs, you may want to consider waiting to exercise until 2018 if you believe tax reform will be enacted and lower tax rates will apply in 2018. I would recommend factoring in market conditions, since an increase in the stock value over the waiting period could increase the amount of income subject to taxation. Alternatively, if the bargain element now is small, and you think it could increase by next year, you may want to consider exercising in 2017 to minimize the amount of ordinary income recognized on your bargain element.

Proposed Increases to the Social Security wage base

The Social Security Administration’s Office of the Chief Actuary (OCA) has projected an increase in the current Social Security wage base from $118,500 (2015 & 2016) to $126,000 for 2017.

This is bad news for those who are self-employed, operating as either a sole-proprietorship or a single-member LLC (SMLLC). Based on this estimate, each self-employed person with at least $126,000 in net self-employment earnings will pay $15,624 in Social Security taxes alone for 2017. This tax will be in addition to medicare taxes and income taxes at the taxpayer’s ordinary marginal rate.

Below are the social security wage base projections for 2017 on:

  • 2017 — $126,000
  • 2018 — $129,900
  • 2019 — $135,900
  • 2020 — $142,500
  • 2021 — $148,800
  • 2022 — $155,100
  • 2023 — $161,700
  • 2024 — $168,300
  • 2025 — $175,200

The OCA is projecting that the Social Security trust fund will become insolvent in 2034. As an entrepreneur, what steps are you taking towards minimizing your exposure to the Social Security Tax?

 

 

Controversial Charitable Contribution Regulation Withdrawn

This past September, the IRS proposed a regulation that would require charitable organizations to collect personal information from its donors and file information returns with the IRS with this personal information for donations over $250. The IRS would, in turn, would use informational returns received from the donee to match the amounts with the social security numbers of the donors.

A few days ago, we received notice that the IRS has scrapped these regulations. (whew!) This could have only led to more paperwork for non-profit organizations and greater risks for individuals to become victims of identity theft.

As a reminder, the IRS still requires contemporaneous written acknowledgement of a contribution from a charitable organization if the donation exceeds $250.  The acknowledgement must state the amount of cash or a description (but not the value) of property other than cash contributed. The letter must also state whether the donee provided any “goods or services” in consideration for the contribution. Lastly, if the goods or services received were entirely intangible religious benefits, the letter must provide a statement to that effect.

For more information on charitable contributions, please contact Paul Glantz, CPA at paul@launchconsultinginc.com

 

Highway Bill Gives IRS Power over Passports

Last week President Obama signed into law the Highway Bill, a five-year $305 billion law that will focus on improving highway and transit projects. Included in that law were two controversial provisions that didn’t receive as much press.Both these provisions were included as offsets that are expected to cover the infrastructure spending.

Aside from the IRS bringing back private debt collectors, the new law gives the State Department the power to deny or revoke the passport of individuals with unpaid disputed tax bills. The passport revocation would only occur after the IRS has issued a lien or levy. If you have a payment agreement set up with the IRS, don’t worry, you’re in the clear. As far as privatizing debt collectors, expect to see an increase in criminals posing as IRS agents or collection companies.

More information on the Highway Bill here .

If you have questions about safeguarding your personal information, be sure to check out these tips.

For additional questions on how this law may impact you, contact Paul Glantz, CPA at paul@launchconsultinginc.com

IRS Audit Rates Drop, Again

A recent report shows IRS individual audit rates at the lowest level since 2004. In addition to cuts in IRS funding and staffing, the 8 million phone calls the IRS dropped, and the cyber theft of $39mm from fraudulently filed returns, audit rates have dropped to 0.84%. To put this in perspective, just over 8 returns for every 1,000 filed are examined by the IRS in person or via mail correspondence.

Tax Return, Tax Preparation, CPA, Certified Public Accountant, Austin, Texas, 78701, 78703, 78745, 78746, Tax Refund, 1040, 1065, 1120S

USA Today compiled audit rates from 2000-2015

The drop in audit rates marked the third consecutive year with audit coverage below 1%. Things have not been looking good for the IRS post the Tea-Party Scandal. Revenue from audit collections have been a measly $7.32 billion so far this year, compared with the $14.7 billion average between 2005-2010.

Less head count in the office, fewer audits, and longer phone wait times put the voluntary compliance system at risk for tax cheats and fed up taxpayers.

The IRS is working diligently to correct the problems. We have already seen new processes for ramping up security and battling fraudulent returns.

 

For questions or more information on how this may impact you, or if you are in need of assistance with an IRS audit, contact Paul Glantz, CPA at paul@launchconsultinginc.com

Update: New Tax Deadlines

President Obama Signing into law H.R. 3236 the

On the last day of July, Obama signed into law, H.R. 3236, the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015”. One of the provisions of this law included a change to the due dates of corporation and partnership tax returns.

Previously, C-Corporation and S-Corporation tax returns were required to be filed within two and a half months after the close of its tax year, or March 15 for calender year filers, and partnerships were required to file within three and a half months after the close of their tax year, or April 15, the same date that applies to individuals.

The Act moved the partnership deadline to March 15 (or two and a half months following the close of its fiscal year), and pushed the C-Corporation deadline back a month, to April 15 (or three and a half months after the close of its tax year). For most taxpayers, this law will be effective for the 2016 tax year, as it addresses tax years beginning after December 31, 2015.

For more information on H.R. 3236 or tax deadlines, contact Paul at paul@launchconsultinging.com

No Penalty for Delinquent FBAR Submissions

Several years ago, the IRS passed legislation aimed to catch at tax cheats harboring income producing assets in foreign bank accounts. The legislation required taxpayers to disclose details relating to off shore banking accounts to the U.S. Treasury (and more recently on Form 8938 for the IRS). The form, referred as the Report of Foreign Bank and Financial Accounts, commonly called an “FBAR” (now revised and reported on FinCEN Form 114) carried strict penalties, currently the greater of $100,000 or 50% the account balance for each year  the taxpayer willfully fails to comply. And, yes, I’ve seen clients hit hard, with $10’s of millions in civil penalties.

While this law was aimed at tax cheats, it catches other taxpayers who may not be willfully trying to deceive the government, but could still fall prey to the harsh penalties. If you are a taxpayer who has signature authority over an foreign account with a balance greater than $10,000, have not filed an FBAR in the past, have not been contacted by the IRS, and are not under civil or criminal investigation by the IRS, you may qualify for relief under the new delinquent FBAR submission procedures (note that these are different from the OVDP program).

FBAR’s for the 2014 tax year are due next week, June 30.

For more information on whether or not you are required to file and FBAR, or you have questions on how to qualify under this new procedure, please contact Paul at paul@launchconsultinginc.com

 

“Blow Up the Tax Code and Start Over”

Rand Paul wrote a piece in the Wall Street Journal the other day titled “Blow Up the Tax Code and Start Over”. Can his proposal for a flat 14.5% tax to personal and corporate income be the solution to our nations complex tax code?

Rand states that from 2001 to 2010, there was an average of one “fix” made to the tax code daily, for a total of over 4,400 in that same ten year span. Clearly the code has become much more complex. Rand proposal includes an elimination to all deductions with the exception of mortgage interest and charitable givings, and even goes as far as eliminating payroll taxes. Rand also proposes that the first $50,000 of income for a family of four would not be subject to tax.

The complexity of the tax code has obviously become an issue in America, but government spending needs reformation as well. Rand’s plan may be on the right track, but he doesn’t go in depth about how medicare and social security would be funded if payroll taxes were cut, he doesn’t examine the unforeseen implications of granting families of four or larger their first $50,000 tax free, and the effect it will have on population growth, poverty growth, the food supply, and our resource supply. Despite these issues, I applaud Rand for proposing a solution to a problem that has really impacted growth in America.

What are some of your thoughts?

Email me at paul@launchconsultinginc.com

 

Tax Relief for Disaster Victims in Texas

On its website, the IRS announced relief for taxpayers in Harris, Hayes, and Van Zandt who were affected by the severe storms, tornadoes, straight-line winds, and flooding that took place in Texas beginning on  May 4, 2015.

This means affected taxpayers are eligible for an extension of time to perform time sensitive tasks such as filing and paying taxes. Some of the qualifications include:

  • Taxpayers whose principal residence, or business entity whose principal place of business is located in the counties mentioned above
  • Individuals who are relief workers assisting with the disaster area

Launch Consulting, Inc. sends its deepest gratitude to clients and their friends and families impacted by the flooding caused by adverse weather in the Austin area.

For more information on additional taxpayers who may be eligible for relief, please visit the IRS website.

For questions on the tax implications of losses please contact Paul Glantz, CPA at paul@launchconsultinginc.com

Spring 2015 Statistics of Income IRS Bulletin Released!

Last week, the IRS released the Spring 2015 Statistics of Income Bulletin. The bulletin includes preliminary numbers from the 2013 tax year. Some of the more interesting data points include the following:

  • 147.7 Million tax returns were filed, 1.9% more than the previous year.
  • Although Adjusted Gross Income (AGI) and taxable income was only up 0.8% from 2012 to 2013, total income tax increased 3.6% and total tax liability increased 4.5%, mainly due to the increase in the marginal tax rates implemented in 2013.
  • The Net Investment Income Tax (NII Tax – 3.8%), new for 2013, brought in $11.7 Billion from 3.1 million tax returns.

The complete bulletin can be found here.

CPA, Austin, Texas, Taxes, Tax Refunds, IRS

Spring 2015 Statistics of Income Bulletin