In just a couple of weeks, employees will begin receiving Forms 1099-B for sales they conducted in 2015. Here are five things they need to know about Form 1099-B:
What Is Form 1099-B? Anytime someone sells stock through a broker, the broker is required to issue a Form 1099-B reporting the sale. This form is provided to both the seller and the IRS. It reports the net proceeds on the sale, and in some cases, the cost basis of the shares sold. The seller uses this information to report the sale on his/her tax return. [Same-day sale exercises can be an exception. Rev. Proc. 2002-50 allows brokers to skip issuing a Form 1099-B for same-day sales if certain conditions are met. But your employees don’t need to know about this exception unless your broker isn’t issuing a Form 1099-B in reliance on the Rev. Proc.]
The Cost Basis Reported on Form 1099-B May Be Too Low. For shares that employees acquire through your ESPP or by exercising a stock option, the cost basis indicated on the Form 1099-B reporting the sale is likely to be too low.
Sometimes Form 1099-B Won’t Include a Cost Basis. If employees sold stock that was acquired under a restricted stock or unit award, or if they acquired it before January 1, 2011, the Form 1099-B usually won’t include the cost basis (although procedures may vary, so check with your brokers on this).
What To Do If the Cost Basis Is Incorrect (or Missing). If the cost basis is incorrect, employees will need to report an adjustment to their gain (or loss) on Form 8949 when they prepare their tax returns. If the basis is missing, they’ll use Form 8949 to report the correct basis.
An Incorrect Cost Basis Is Likely to Result in Employees Overpaying Their Taxes. It is very important that employees know the correct basis of any shares they sold. They will subtract the cost basis from their net sale proceeds to determine their taxable capital gain (or deductible capital loss) for the sale. Reporting a cost basis that is too low on their tax return could cause them to pay more tax than necessary. In some cases, this doubles their tax liability. The only person who wins in this scenario is Uncle Sam; your employees lose and you lose, because no one appreciates the portion of their compensation that they have to pay over to the IRS. Your stock compensation program is a significant investment for your company; don’t devalue the program by letting employees overpay their taxes.
Employees should review any Forms 1099-B they receive carefully to verify that the cost basis indicated is the correct basis. If it is missing or incorrect, they should use Form 8949 to report the correct basis.
The Portal also has examples and flow charts, all of which have been updated for the 2015 tax forms. [In case you are wondering, there were no significant changes to Form 1099-B, Form 8949, or Schedule D in 2015.]
With the FASB and the SEC issuing significant announcements impacting stock and executive compensation, it only seems right that we should also be dealing with changes to the tax regs impacting stock compensation. Luckily the IRS has obliged with a proposed amendment to the procedures for filing Section 83(b) elections.
Background
I’m going to assume that you all know what a Section 83(b) election is and when it would be filed. If not, read the discussion of “Early Exercise” in the NQSO Portal and the discussion of “Section 83(b) Elections for Restricted Stock Awards” in the article “Taxation of Restricted Stock Awards,” available in the Restricted Stock Portal.
Previously, award and option holders wishing to file a Section 83(b) election had to mail the election to their IRS service center within thirty days of the triggering transfer (a grant of restricted stock or exercise of an unvested option) and also include a copy of their election with their tax return for that year. With the IRS now encouraging taxpayers to file their returns electronically, the requirement to include a copy with your tax return has turned out to be problematic. Many (dare I say all?) of the systems used to electronically file returns with the IRS simply don’t have the capability of including a copy of a Section 83(b) election, forcing taxpayers to file on paper—a situation in which everyone, both the IRS and the taxpayer, loses.
Recent Developments
Last year, in PLR 201438006, the IRS ruled that a Section 83(b) election is valid even if the taxpayer fails to include a copy of the election with his/her tax return for the year (see my February 3, 2015 blog entry, “Grab Bag“). This ruling was to avoid giving taxpayers an opportunity to rescind their election by simply failing to include the copy with their tax return but it also steered us on a course for the recently proposed amendment (if the election is valid without including a copy with your return, why is the copy necessary).
Proposed Amendments
The proposed amendment would simply eliminate this requirement altogether. There’s really no need for it; as the IRS notes in the preamble to the proposed regs, they already have the original and they scan that for their records upon receipt of it. The requirement to file the copy with your tax return is an anachronism, harkening back to a day before electronic forms and scanners were commonplace.
The IRS does note that taxpayers should keep a copy of the election in their records until the statute of limitations expires for the return on which the sale of the shares subject to the election is reported.
The proposed regulations would apply to all stock transferred (grants of restricted stock and exercises of unvested stock options) on or after January 1, 2016 but taxpayers can rely on them for stock transferred in 2015.
Our first discussion of cost-basis reporting was posted back in 2009, yet, here we are, still talking about it half a decade later.
Why Am I Still Blathering On About This?
This is still a topic for discussion because the rules have changed again this year. For any shares acquired on or after January 1, 2014, brokers are no longer allowed to voluntarily include the compensation income recognized in connection with the option or award under which the stock was acquired in the cost basis reported on the Form 1099-B issued for the sale. This means that for any shares employees acquired under their options and awards this year, the cost basis reported on Form 1099-B is likely to be too low. Employees will have to report an adjustment on Form 8949 when they file their tax return to correct their capital gain/loss for the underreported basis.
Let’s Review
When you sell stock, your cost basis in the stock is subtracted from your net sale proceeds to determine what your capital gain or loss is. For shares acquired under stock awards, your cost basis is the amount you paid for the stock, plus any compensation income recognized in connection with the acquisition (in the case of NQSOs and restricted/units) or disposition (in the case of ISOs and ESPPs) of the stock.
Brokers have been required to report a cost basis on Form 1099-B since 2011. Previously, brokers were allowed to voluntarily include the compensation income recognized in connection with the award in the reported cost basis. This was good because it meant that sometimes the basis reported on Form 1099-B was correct, making it easy in those instances for employees to report their sales on Schedule D and calculate the correct capital gain/loss. But it was also bad because there was no way to tell, when looking at Form 1099-B, whether the reported basis included the compensation income or not. The end result was a lot of confusion and possibly a lot of over-reported capital gains.
Where Are We Now
You might think the IRS would fix this problem by making brokers indicate whether the basis reported on Form 1099-B includes the compensation income. But you would be wrong. Instead, the IRS decided that the basis reported on Form 1099-B should only be the purchase price. This way everyone knows what basis is reported on Form 1099-B. It’s the wrong basis in most cases, but at least we know what it is. That’s a step in the right direction, I guess.
To make things more confusing, for shares acquired before January 1, 2014, brokers can still voluntarily include the compensation income in the basis reported on Form 1099-B (and still can’t indicate on the form if they’ve done this). And, for option grants, brokers can treat the grant date as the acquisition date. I think that most brokers are planning to apply the new rules to everything, regardless of when the shares were acquired/option was granted, but you should check with your brokers to verify what they are doing.
What This Means for Employers
Forms 1099-B will be issued around mid-February. You should plan on distributing some educational material to employees to explain this. The NASPP webcast “The New Forms 1099-B Are Coming! Are You Ready?” will provide more information on the topic. In addition, we’ve updated all the sample forms, flow charts, and FAQs in our Cost-Basis Reporting Portal for the new rules and the 2014 forms. New this year, we’ve added Cost Basis Cheat Sheets, featuring flow charts explaining how to calculate the adjusted cost basis for most types of stock awards.
As we head into the year-end season, I know many of you are going to be looking at your year-end communications to see which parts need to be updated. I thought it might be a good time to remind you that the regulations governing cost-basis reporting for shares acquired under stock options and ESPPs are changing as of January 1.
What’s Changing?
Beginning January 1, 2014, brokers will no longer be allowed to include the compensatory income recognized in connection with shares acquired under an option or ESPP in the cost basis reported on Form 1099-B. Instead, brokers are required to report only the purchase price as the basis and employees will have to report an adjustment on Form 8949 to correct the gain or loss they report on their tax return (see my blog entry, “Final Final Cost-Basis Reporting Regs,” May 7, 2013)
Until next January, brokers can voluntarily choose to include this income in the basis, but are not required to do so. Thus, we are going from a situation in which the cost basis reported on Form 1099-B is actually sometimes correct to a situation in which it will virtually always be wrong. Ten points if you can name a scenario in which the purchase price is actually the correct basis for shares that were acquired under a stock option or ESPP.
[Note that, technically, the regs will only apply to options acquired after January 1, 2014, but we think most brokers will apply them to all shares acquired after the date, even if the shares were acquired under an option granted prior to that date.]
How Does This Impact Forms 1099-B for Sales in 2013?
That is a good question! Right now, we are in a transition period. Brokers can continue to report under the old rules for 2013 or they can voluntarily change over to the new rules. A good first step to reviewing your year-end employee communications will be to check in with your brokers on this, so you know what they are planning to do and can adjust your communications appropriately, if necessary.
Does this Impact Restricted Stock and Units?
In most cases, it will not have any impact on restricted stock or RSUs. Arrangements in which employees don’t pay cash for the shares aren’t covered by the regulations so brokers don’t have to report any basis for them at all on Form 1099-B. That still applies under the regulations going into effect as of January 1, 2014. So I expect that most brokers aren’t reporting a basis for RS/RSUs now and still won’t report a basis once the new regs go into effect.
The only exception will be those brokers that are currently reporting a cost basis on a voluntary basis for RS/RSUs (which I understand to be few and far between). Brokers can still voluntarily report a basis for shares acquired under RS/RSUs, but for shares acquired after January 1, 2014, that basis cannot include any of the compensatory income recognized in connection for the award. In other words, the broker can still report a basis but the reported basis has to be $0. I hope that brokers don’t do that–I think it would be better to not report a basis at all than to report an incorrect basis of $0.
Can the NASPP Help?
Why, yes, we can! Our Cost-Basis Reporting Portal includes some great sample materials to help you explain all of this to your employees. We have sample tax forms, flow charts, and extensive FAQs. Check it out today and keep an eye on the portal; we will update it as new tax forms become available from the IRS.
As my readers know, cost-basis reporting went into effect last year for Forms 1099-B. This resulted in a number of changes to Form 1099-B, introduced Form 8949 to the stock plan administration lexicon, and created a whole new “opportunity” for employee education.
If you were thinking we were done with this topic–think again! This year, the IRS has further revised Form 1099-B and also changed Form 8949–finally issuing instructions to the new Form 8949 just last week. Any educational materials you may have created last year will likely need to be updated. The examples, FAQs, and flow charts in the NASPP’s Cost Basis Portal have all been updated for the new forms and instructions (now you know what I did this weekend).
New boxes 1d and 1e report the stock symbol and number of shares sold. There is still a description box (now box 8, formerly box 9 in 2011) where this information also appears.
Former box 2 (sales price) is now box 2a. This makes room for new box 2b, which has something to do with losses that are disallowed for reasons I don’t understand. Something about acquisitions/changes in corporate structure and foreign corporations–I’m pretty sure it doesn’t have anything to with stock compensation.
Former box 8 (short- or long-term gain) is now box 1c.
Box 6 now has two checkboxes: a) for noncovered securities, and b) indicates that the basis was reported to the IRS. Presumably the IRS can figure out whether or not the basis was reported to them, so I assume that box 6b is there to confirm for employees (and their tax preparers) that the basis was (or was not) reported to the IRS (e.g., if the broker reported the basis on the substitute Form 1099-B issued to the employee but didn’t report the basis to the IRS, box 6b would not be checked).
A bunch of other boxes that I don’t care about were renumbered.
Former column (b) (adjustment code) is now column (f). This also means that former columns (c) through (f) have all shifted to the left and are now columns (b) through (e). I guess it makes sense to have the adjustment code next to the adjustment column, but I do kinda wish the IRS had thought of this when they first created the form–it took a long time to update all the column references.
New column (h) now shows the taxpayer’s gain or loss for each transaction. Last year, gains/losses were only shown in aggregate on Schedule D.
Where the cost basis is reported to the IRS, new code “E” is entered in column (f) when the transaction fees are not reflected in either the sale proceeds or the cost basis reported on Form 1099-B (an adjustment in the amount of the fees is also entered in column (g)).
If the employee’s copy of Form 1099-B (or substitute) reports an incorrect basis and that basis was not reported to the IRS (indicated in new box 6b of Form 1099-B), the employee should report the correct basis in column (e) of Form 8949 but should also report code “B” in column (f), even though no adjustment will be entered in column (g). I’m not sure why the IRS wants taxpayers to enter an adjustment code when there’s no adjustment. It’s the IRS; go figure…
If multiple codes are entered in column (f), they should not be separated by a space or comma. Last year, they were supposed to be separated by a space or comma. Seriously? Ok, now it seems like the IRS is just changing things to change them–that’s just rude.
Some Things You Can Still Count On
The good news is that there have been no changes to Forms 3921 and 3922 (or maybe that’s bad news if there’s something you were hoping the IRS would change about them). Also, tax preference income for ISO exercises is still reported on line 14 of Form 6251 (for all I know, the whole rest of Form 6251 has changed, but at least line 14 is still the same). I feel a little better now.
A Great Resource for Employees
A shout-out to Bruce Brumberg of myStockOptions.com for letting me know that the IRS had issued new instructions to Form 8949 and for giving me a quick run-down of the changes. If your employees have questions about the tax treatment of their stock compensation, myStockOptions.com is a great resource for them. The myStockOptions Tax Center has oodles of resources on reporting stock plan transactions on tax returns, even a free video on this topic.
It’s April already, and in spite of the sneezing and wheezing of spring allergies in full force all around me, I couldn’t help but notice that we’re less than two weeks away from tax filing deadline day. April 17th is just around the corner. (Yes, if you’re late in starting your tax return, it is due on April 17th this year; April 15th falls on a Sunday and April 16th is a holiday in Washington, D.C., so that gives filers until April 17th to file their returns.) I’ve been wondering how stock plan administrators are faring this tax season. With the new Schedule D, 1099-B cost-basis reporting, and additional new IRS forms, I’ve felt certain there would be volumes of employee questions.
Do People Really Procrastinate?
There is an abundance of statistics on taxpayer filing habits; many land near a 40% figure as the number of taxpayers who file their tax returns during the last two weeks before the deadline. When I worked on the issuer side of the industry, I recall planning for those first two weeks in April to be filled with last minute participant questions. So I ask: are the questions pouring in this year? If so, I offer some last minute survival strategies for making it through one of our more complex tax seasons (from an equity compensation perspective, of course!) in recent years.
Have Resources Available to Answer the Phone/Email
Even if you’re sure you’re not going to pass out tax advice; even if you’re certain that the broker can answer all of their 1099-B questions, if you had significant transaction activity resultant from your stock plans in 2011, expect that a fair number of those participants have not yet filed their tax returns and they will emerge at the last minute. There’s an expression that I’ve heard often: “Failure to Plan on Your Part Does Not Constitute an Emergency on My Part.” Well, yes, that’s a fair argument. Yet in reality, we know participants are going to have questions. Rather than taking a stand against procrastination, sometimes it’s better to just accept that these things are going to happen and plan accordingly. Look at your volume of activity during 2011, and if it was minimally significant or more, make sure you have a plan in place for someone to answer that participant call. When up against a deadline, nothing is worse than getting voice mail or sending an unanswered email.
Anticipate, Anticipate, Anticipate!
We’re nearing the end of tax season, so hopefully you’ve already gained some flavor for what participants are asking about this year. It’s been a complex tax reporting season from a stock plan perspective, so anticipating hot button questions and having a ready response will help both sides: you with managing the inquiries, and participants with getting what they need quickly. One great trick I heard about (and tested myself once upon a time) can be applied to your email inbox. You can come up with a list of the top 10 questions that you think participants will email about, and then prepare an “auto reply” that lists the top 10 questions and answers. When the participant emails in a question, they will automatically receive the auto-reply. In many cases, the participant may find their answer in the auto-reply and won’t have to wait for you to respond individually to their email. I would suggest that you still respond, but knowing that in many cases the employee could potentially get the information even faster via the auto reply can go yards in assisting employees during peak periods. Keep in mind you don’t have to necessarily answer “tax” questions; sometimes the employee is just looking for a next step or other resources. Something as simple as a question/answer that addresses where they can find more information on a particular topic can be helpful.
I wish you all smooth sailing through the last couple weeks of tax season.
For stock plan administrators that work for US companies, the lives of their counterparts at non-US multinationals must seem glamorous–the multi-cultural environment, cool accents of overseas co-workers, early-morning and late-night meetings to accomodate worldwide time zones, and overseas travel. But now, stock plan administrators at US companies have something to be thankful for–they don’t have to worry about FATCA.
What the Heck is FATCA? Despite the acronym, FATCA has nothing to do with overweight Californians. And, even though you might be tempted to think so, none of the letters in the acronym stand for a four-letter word. It refers to the Foreign Account Tax Compliance Act that was enacted as part of the 2010 HIRE Act. The purpose of FATCA is to prevent US tax payers from avoiding paying tax on foreign securities by holding them at non-US financial institutions. So if some US billionaire holds a bunch of stock of some European company in an offshore account in the Cayman Islands, he still pays tax on his gains. I think most of us can get behind that.
The part of FATCA that you aren’t going to like is a requirement for US taxpayers (whether they live in the US or not and whether they are US citizens or not–basically, anyone paying US tax) to report any securities of non-US companies that they own that they don’t hold at a US financial institution. And, well, you can guess what is coming next because we’ve all been down this path before–stock options, SARs, RSUs, etc., as well as any stock acquired under stock compensation programs are all considered securities. So where US taxpaying employees have the right to acquire stock of a non-US company (e.g., via an option, SAR, or RSU) or have acquired stock of a non-US parent, they have to report that right, and underlying stock acquired pursuant to the right, to the IRS if they don’t hold these securities at a US financial institution.
It’s fairly clear that the reporting requirement applies to stock held in certificate form, book entry, in DRS accounts, or at non-US brokerages firms or financial institutions (e.g., an Israeli trustee). Likewise, it could apply to restricted stock held in an escrow arrangement or at a transfer agent. Restricted stock held in a restricted account at a US brokerage firm would be exempt from the reporting requirement.
In the case of options, SARs, and RSUs, application of the reporting requirement is less clear. Even if employees log onto an online website hosted by a US brokerage firm to view their option and RSU holdings, those holdings really aren’t held at the brokerage firm. The grants are issued in the employee’s name and are held by the employee; it is only when the grants are paid out that the underlying shares will likely be issued into an account at the broker (and held in the broker’s name). So technically, the grants could be considered to be subject to this reporting requirement, even though once they are paid out, the underlying shares probably won’t have to be reported.
I cornered Valerie Diamond of Baker & McKenzie on this at the CEP Symposium last week, who offered a glimmer of sanity on this. Valerie told me that despite the technical requirements here, based on conversations she’s had with an IRS staffer, it might be reasonable to take the position that outstanding grants under a program that is administered by a US broker are exempt from the reporting requirement. The operative word here is “might”–how much of a risk are your employees prepared to take? The penalty to the taxpayer for failing to comply starts at $10,000, enough to make a taxpayer think twice.
Reporting Thresholds
Another glimmer of sanity is that the US taxpayer’s holdings have to exceed specified thresholds for the reporting to be required. But immediately, we’re back to insanity because the thresholds are too complicated for me to explain here in the blog (we have some great memos that provide a table illustrating the thresholds–e.g., see the Baker & McKenzie and PwC memos). They vary based on filing status and whether the taxpayer lives in the United States and are also based in part on whether the value of the securities exceeded the stated threshold at any point during the year (yep, you read that right, if the value of the securities exceeded the threshold for a mere five minutes of trading on one day during the year, that could trigger the filing requirement). Good luck to your employees on calculating that amount.
Unvested options and RSUs don’t count towards the thresholds, but if the thresholds are exceeded, must be reported (at a value of $0). Restricted stock does count towards the thresholds.
How Clever Is Your CEO?
Since execs often aren’t required to hold their stock at the company’s designated broker, it bears mentioning that if they are acquiring non-US securities through your company stock plans and, say, your CEO is one of those billionaires that will take the acquired shares and squirrel them away in an account in the Cayman Islands, he’d better report those shares to the IRS. Maybe it would be best to ask your general counsel to break this news to him. Just sayin…
Is an Extension Necessary?
The report is completed on Form 8939, which is included with the taxpayer’s tax return. This is in effect for last year’s tax return, due to the IRS in just a couple of weeks.
There are a lot of unknowns here, particularly with regards to how the requirements apply to stock compensation. If this isn’t something you’ve been paying attention to and you have employees that might be required to file Form 8939, you may want to suggest that they file for an extension on their tax return, so that both you and they have some additional time to figure out the reporting requirements.
Spoof S-1 If you missed it on Sunday, the Motley Fool announced they were going public as an April Fools joke and included a spoof S-1 statement. It’s definitely worth ten minutes of your day to read through it; I laughed out loud several times (although some parts are a little too close to the truth for comfort).
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
If you are in the area, don’t miss the half-day Philadelphia chapter meeting at Lincoln Financial Field on April 9. Last year’s meeting was a blast. Jenn Namazi, the NASPP’s Editorial Director, will be there–be sure to say hello!
Back in November, the IRS proposed additional regulations on cost-basis reporting. These regulations primarily relate to the third phase of implementation of the reporting requirements, which applies to options and debt securities. But there are a few areas in the regulations that are of interest to stock plan professionals.
You Win Some: Sale Proceeds to Be Reported Net of Fees
It will come as a relief to anyone that has reviewed any of my cost-basis reporting flow charts to know that the regulations would require all brokers to deduct the transaction fees from the sale proceeds reported on Form 1099-B. In my humble opinion, this is a requirement that is long overdue. The fees are usually a small amount, sometimes immaterial, but trying to explain how they are included in the tax return when the broker doesn’t deduct them from the sale proceeds (or worse, when you don’t know whether the broker has deducted them) is almost an insurmountable challenge. If the IRS adopts these regulations and requires all brokers to report the sale price net of fees, I’ll be able to reduce my 6039 flow charts from 14 pages down to a mere five pages.
You Lose Some (or The More Things Change, the More They Stay the Same)
Readers of prior NASPP blog entries (see “Four Questions to Ask Your Brokers,” Nov. 30, 2010) know that the current regulations, which have been in effect since January 1, 2011, allow brokers to exclude the compensation component from the reported cost basis until 2013 for shares acquired under stock compensation arrangements. The newly proposed regs not only retain this exclusion but remove the limitation that it is only available until 2013. Thus, it doesn’t look like brokers will be required to report the full basis of shares acquired under stock compensation arrangements for the foreseeable future. I guess the silver lining here is that now you will get more than two years of use out of all those great educational materials you’ve been creating to explain this to your employees.
The regulations state that the IRS is contemplating requiring brokers to indicate whether the shares sold were acquired under a compensatory arrangement on the Form 1099-B (and in transfer statements). Frankly, I’m not really sure this helps much. For most employees, even executives, the only stock of their employer that they own was acquired through compensatory arrangements. When they sell their employer’s stock, I think they probably already know that the stock was acquired through a compensatory arrangement.
The proposed regs also state that the IRS will update the instructions to Schedule D and Form 8949 to clarify that the basis for shares acquired under compensatory arrangements may be incorrect. I have to admit that I’m not confident this is going to help much, especially given how clear the instructions included with Forms 3921 and 3922 are.
I will be hauling my cost-basis reporting soapbox to the February Silicon Valley and Sacramento chapter meetings, where Larry Reynolds of E*TRADE and I will provide a just-in-time overview of cost basis and the new Forms 1099-B. I hope to see you there!
Get in the Game If you haven’t been playing the NASPP Question of the Week Challenge, now is a great time to join the game. A new challenge just started and you have until Feb 3 to answer all the questions posted in January (after that, you only have a week to answer each question). All the cool kids are doing it–sign up today.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
As our faithful readers know (because we’ve certainly harped on this topic enough), 2011 Forms 1099-B (which brokers will be sending out shortly) are subject to the new cost-basis reporting requirements. We’ve posted some resources to help you understand the new requirements and help you get a start on materials explaining them to your stock plan participants. In today’s blog entry, I highlight the new (and a few old) materials now available on Naspp.com.
Reporting Examples
We’ve created the following reporting reporting examples. Each example includes an annotated Form 1099-B, Form 8949, and Schedule D so you can see how sales of shares acquired under the various scenarios will appear on each of these forms:
We’ve also posted a sample FAQ on the new cost-basis reporting requirements and the new Form 8949. It even includes an annotated Form 8949. Use this as a starting point for your own FAQ for your stock plan participants.
We’ve also posted a sample email that might be sent to employees to alert them to the dangers of not verifying that the cost basis reported on their Form 1099-B is correct.
Flow Charts
Last year, we created the renowned Section 6039 flow charts (one member told us these charts alone made membership worth the cost), which explain how employees can use Forms 3921 and 3922 to report sales of shares acquired under ISOs and ESPPs on their tax returns. Those flow charts have now been updated for the new Form 1099-B and Form 8949. In addition, we’ve created flow charts for NQSOs and RS/RSUs.
For your employees, myStockOptions.com is a great resource, offering illustrated and annotated tax forms, FAQs, and numerous articles on how employees should report sales of stock on their tax return.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
We are about half-way through the first tax year in which employers have known the income reporting, tax withholding, and valuation requirements for employees in India. Last year (2009/2010) was quite a scramble, with retroactive updates and guidance being provided late into 2009.
Valuations
One issue that companies continue to work with is the calculation of FMV, as a Category 1 Merchant Banker valuation is still required for companies not listed on a recognized exchange (Neither NASDAQ nor NYSE are recognized exchanges.). There were several months where it was unclear whether or not Merchant Banker valuations would be required. If your company reported and withheld based on the market value of your stock during the 2009/2010 tax year, you should have adjusted your reporting at this point.
Frequency
When it comes to Merchant Banker valuations, frequency is still a key consideration (and one that will remain so long as these valuations are required). The regulations state that valuations are only required every 180 days, so it is possible to only value your company’s shares two times a year. However, this may not right for your company, especially if the trading value of the shares has decreased significantly since the most recent valuation.
Double Standard
The difference between the Merchant Banker valuation and the trading value of the stock will remain an ongoing issue regardless of how often your company has a valuation performed. If your stock plan administration software does not permit more than one FMV on a trading date, you may have to provide custom employee communications to accommodate the FMV that was used to calculate income.
Australia
Reporting Obligations
Generally speaking, most options and RSU grants in Australia awarded after July 1, 2009 are taxable at vest. There is no withholding obligation for employers, but there is a reporting obligation of Employee Share Scheme (ESS) statements to both the employee and the Australian Tax Office (ATO). They are not unlike the U.S. Section 6039 information statements in theory; presumably they will help employees better understand how to complete their own tax returns and will help the tax authorities determine if income is being properly reported on tax returns, which they will be auditing (See this alert from Deloitte.)
Valuation
For RSUs, the trading value of the shares at vest may be the FMV for income calculation. However, options are considered an “unlisted right” and might require a valuation method (e.g.; Black Scholes) to determine the market value of the shares on date of the taxable event.
30 Day Rule
One tricky piece of determining the FMV on the taxable date in Australia is the 30 day rule. If an employee sells shares from an RSU vest or option exercise within 30 days of the original taxable event date, then the sale date might be considered the taxable event, provided the company is aware of the sale.
Employees
Individual tax returns for the 2009/2010 tax year are due by October 31, 2010. Employees may still be trying to understand the ESS statements provided to them by the company.
Taking Action
Many companies appear to have moved away from granting options in Australia as a result of the reporting obligations. We completed a Quick Survey on this in September; only 20% of respondents were continuing to grant options in Australia, 38% were not granting options to begin with, and a significant 42% were moving to share grants (like RSUs) or some type of cash compensation.