OT: Tax Gurus...Stock Option Question, AMT section? Options

[nine14cats]

Tis the season to be taxed...... (IMG:http://www.914world.com/bbs2/html/emoticons/laugh.gif)

Question for the tax gurus:

Background
========

I exercised a boat load of stock options last tax year (2004). Since it's a private company and not publicly traded, twice a year an independant auditing company comes in and sets the relative worth of the internal stock. In any case, part of this companies stock option plan is that the employee must have some weighted risk involved (no cashless transactions), in this case you must hold the stock for a minimum of 6 months to qualify your "risk".

So the scenario is that I purchased my shares at a given price in 2004 and I paid the estimated taxes on the stock's capital gains in 2004. Due to the 6 month waiting period the tax years 2004 and 2005 overlap, so in 2005 the actual sale of the stock and cash out occurred. Luckily, the estimated and actual sales price / tax paymets are very close.

Where is something like this addressed inside the tax forms? Since I already reported it as earned income in 2004 and paid the appropriate taxes, this is more of an adjustment. But I do have a brokers statement stating the actual gross payout on a 2005 tax year statement.

My first thought is that this may be handled under the AMT (Alternative Minimum Tax) section, but in reality, I haven't read through my tax books yet. Just being lazy as this is the last thing to do.

I was hoping someone went through something similar and can give me a pointer on where to read up on it in the tax code.

And yes, I also have a tax professional that I use from time to time, but I'm also one of those people that likes to try and understand where everything is going, even if I use my accountant.

Any tips appreciated!

Bill P.

[DNHunt]

I'm no tax expert more of a paying expert. Everytime I've been involved with AMT it's been bad. What does your tax accountant say? It seems like sometimes there aren't clear cut answers and you just have to do something and then hope.

Dave

[Eddie914]

Employee Stock Options

IRC §421, §422 and §423, and IRS Publications 525 and 15-B

A stock option grants an individual the right to purchase a certain number of shares of stock at an established price. The grant of a stock option may allow purchase at an unspecified future date, but the option will generally expire after a period of time.
Two classes of stock options, incentive stock options (ISOs) and employee stock purchase plans (ESPPs), receive beneficial treatment under the Tax Code and are referred to as “statutory stock options.” If requirements are met, stock purchased under a statutory stock option plan produces capital gain or loss when sold. This has the effect of shifting compensation for employees from ordinary income to capital gain in the amount of the stock’s appreciation.
Stock options other than ISOs and ESPPs that are not allowed special tax benefits under the Tax Code are referred to as “nonstatutory stock options.”
Tax effects relate to one or more of the following dates:
• Grant Date. The date on which the company grants the option to purchase the stock.
• Exercise Date. The date on which stock is actually purchased.
• Date of Disposition. The date on which stock is eventually sold.
Statutory Stock Options—ISOs and ESPPs
For an option to qualify as a statutory stock option, the individual must be employed by the company granting the option, or a related company, from the time the option is granted until three months before the option is exercised (for ISOs the three-month period is extended to one year for disabled individuals). The stock must be held for at least two years from the grant date and for at least one year from the exercise date. The option may not be transferable except at death.
Tax treatment. With a statutory stock option, income is not recognized on the grant date or on the exercise date. When the stock is eventually sold, the difference between the amount paid for the stock and the amount realized from the sale is treated as capital gain or loss. This amount is reported on Schedule D of Form 1040 for the year of sale.
Exceptions:
• Alternative minimum tax. At the time an ISO is exercised, if FMV of the stock is greater than the option price the difference must be added to alternative minimum taxable income for that year. The AMT basis in the stock is increased by the amount of adjustment. No adjustment is necessary if the stock is disposed of in the same tax year in which the option is exercised. Note: The AMT adjustment does not apply to ESPPs.
• Holding period requirement. If a statutory stock option is sold within two years from the grant date or within one year from the exercise date, the holding period requirement is not met. Failure to meet the holding requirement may result in ordinary income.
If holding period requirement is not met:
For ISOs, gain is ordinary income up to the amount by which the FMV on the exercise date exceeded the option price. For ISOs, ordinary income is limited to gain on the sale. Any excess gain is capital gain. If the sale results in a loss, no ordinary income is recognized.
For ESPPs, gain is ordinary income up to the amount by which the FMV on the exercise date exceeded the option price, but is not limited to gain on the sale. Ordinary income is reported, then that amount of ordinary income is added to the stock basis for determining gain or loss.
Ordinary income from the sale of statutory stock options is reported as wages on line 7 of Form 1040 for the year of sale. This amount will often be reported on the employee’s Form W-2.
• Options granted at a discount. Even if the holding requirement is met, if an option under an ESPP is granted at a price lower than the stock’s FMV, the taxpayer must recognize ordinary income on sale up to the amount by which the stock’s FMV on the grant date exceeded the option price. If the stock is sold at a loss no ordinary income is recognized. Note: The option price of an ISO may not be less than the FMV on the grant date. [IRC §422((IMG:http://www.914world.com/bbs2/html/emoticons/cool.gif)(4)]
Employment taxes (Notice 2002-47). Proposed regulations provide that FICA and FUTA taxes apply at the time an employee exercises a statutory stock option. However, Notice 2002-47 states that until final guidance is issued, the IRS will not assess FICA or FUTA taxes or require federal income tax withholding when an employee exercises a statutory stock option or when an employee sells stock that was acquired by exercising a statutory stock option.
Nonstatutory Stock Options
For nonstatutory stock options, if the FMV of the option can be readily determined (such as when the option is traded on an established market), the option is taxed to the employee as compensation at the time it is granted.
If the FMV cannot be readily determined, the option is taxed to the employee when it is exercised. The amount included as compensation is the difference between the amount paid for the stock and FMV at the time it becomes substantially vested.
Restricted property. If stock received has restrictions affecting its value, do not include the value of the stock in income until it has become substantially vested (when the stock is transferable or no longer subject to substantial risk of forfeiture). When the property becomes substantially vested, the FMV minus the amount paid is included in income for that year.


Does this help?

Eddie

PM sent

[jr91472]

I would get professional advice. I went through a similar thing about 5 years ago. I was fairly complicated and but I got through it unscathed.

It a crazy thing, but I watch folks be on the edge of making serious dollars end up owing tons. Not pretty.

Spend the money - seek a professional.

[nine14cats]

Hi Eddie,

Thanks for the explaination. It cleared up my questions. I know where to look and what to do. One of the scenarios in your excerpt explained my exact circumstance.

This club rocks! (IMG:http://www.914world.com/bbs2/html/emoticons/smilie_pokal.gif)

Bill P.

[J P Stein]

Dear tax man:
My name is Bill and I bought an investment grade shitbox.
Every time I turn around, I pour money into it then pour it out at a substantial loss.

Can I write the whole effin' mess off under clause e3490 "bum fuckin' idea" or d0098 "I screwed the pooch"? Neither of these options would make me totaly whole (even if I used both) , but as of now I really don't give a shit....I just want out.

Do I have to sell it or can I just light it on fire?

Respectfully, Bill.