considering all your options: taxation and financial ... · types of equity compensation 4...
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Considering all your Options: Taxation and Financial Planning for Equity CompensationMeredith Johnson, CPA, CFP®
Agenda
§ Overview of Equity Compensation§ Tax Treatment of Equity Compensation§ Financial Planning with Equity Compensation§ Case Studies§ Strategies for Clients and their Professional Advisors
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Life cycle of equity compensation
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Grant
Vest
Exercise
Sell
Types of Equity Compensation
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Founder’s Stock: Issued in the earliest stages
Incentive Stock Options: Possible favorable tax treatment if held two years from grant AND one year from exercise
Non-Qualified Stock Options: Options that aren’t ISOs
Restricted Stock Units: Company stock given to employees—strings attached
Employee Stock Purchase Plan: Employees can purchase stock with after-tax dollars, at a discount
Planning tip: Discuss making an 83(b) election within 30 days of grant
Qualified Small Business Stock
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Domestic C Corporation• Stock issued post 1993• LLC to C conversion okay• Restricted to certain business types (no professional services, sorry)
Stock acquired directly from the company• Acquired for money, property, or services
Assets < $50 million, 80% used in active business• Before and after issuance
5 year holding period• 8/11/93-2/27/10: 50% gain exclusion (+7% AMT)• 2/18/09-9/27/10: 75% gain exclusion (+7% AMT)• 9/28/10 – present: 100% gain exclusion (no AMT)• Gain exclusion applies to greater of 10x tax basis or $10 million
Questions for Prospective Employees to Ask
§For private company grants: What % ownership does the compensation represent?
§When was the last 409A valuation?§Do you allow early exercise?§Are there acceleration provisions?§What is the vesting schedule?§Does the plan allow for cashless exercise?
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Founder’s Stock Tax Treatment Example
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§ Sale partitioned into W-2 compensation and long-term capital gain§ Possible QSBS qualification§ Tax Cuts & Jobs Act impact?§ Planning opportunity: Coordinate large income year with charitable giving,
loss harvesting, and other income reduction techniques
Number of Shares
Common Stock Sold
Aggregate Purchase
Price ($8.55/ share)
409AAggregate 409A Value of Shares
Aggregate Amount
Purchase Price
exceeds 409A
(Comp)
Income Withholding
(25% Federal up
to $1M, then 39.6%)
CA Tax (10.23%)
Medicare (2.35%)
Total Taxes Withheld
Amount Received from Sale
(Purchase Price less Withholding
Taxes)
500,000 $4,275,000 $4.27 $2,135,000 $2,140,000 $730,640 $218,922 $50,290 $999,852 $3,275,148
Incentive Stock Option Tax Treatment Example
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§ Exercise earlier in the year for more DQ flexibility
§ Maximize AMT free exercise (no extra tax cost) with strategic disqualification
§ Coordinate with other types of income recognized in a given year
§ TCJA impact?
NQSO Tax Treatment Example
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§ Exercise and sell to avoid phantom income & minimize risk§ Include the additional Medicare (.9%) and Net Investment Income Tax
(3.8%) when planning§ Cashless exercise available? § TCJA impact?
Grant Name Exercise Method
#Exercised/
Sold
Grant Price
Fair Market Value
Taxable Comp
Total Fair Market Value
Cap Gain/ Loss
Sale Proceeds
Company Proceeds
Total Withholding
Taxes||
Paid
Net Proceeds to Participant
05/13/2015 -Incentive (ISO) -$2.17
Cashless sale 40 4.34 36.26 1,277 1,450 - 1,450 174 1,277
05/13/2015 - Non-Qualified (NQO) -$2.17
Cashless sale 32,691 4.34 36.26 1,043,408 1,185,287 - 1,185,287 141,879 383,153 660,255
TOTALS 32,731 1,044,685 1,186,738 - 1,186,738 142,053 383,153 661,532
RSU Tax Treatment Example
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§ Exercise and sell to minimize risk and diversify§ Financial planning discussion topic: What to do with old RSUS?
ESPP Tax Treatment Example
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§ Disqualifying vs. qualifying disposition§ Planning discussion: funding charitable gifts with ESPP shares
Purchase Date
Purchase Price
Value on Purchase
DateSale Date
Shares Sold
Total Value on Purchase
Date
Total Purchase
PriceGrant Date
Discount on Grant
Date
Total Discount on Grant
DateSale Price
Total Sale Price
W-2 Income
QUALIFYING DISPOSITIONS
05/31/16 $21.7005 12/29/17 379 $8,224.49 12/1/15 $4.6455 $1,760.64 $55.4490 $21,015.17 $1,760.64
$1,760.64
W-2 Income for Qualifying Dispositions is the lower of the Total Discount on the Grant Date or the difference between the Total Sale Price and the Total Purchase Price.
Total W-2 Income $1,760.64
Purchase Date
Purchase Price
Value on Purchase
DateSale Date
Shares Sold
Total Value on Purchase
Date
Total Purchase
PriceSubscrip-tion Date
Discount on
Subscrip-tion Date
Total Discount
on Subscrip-tion Date
Sale Price
Total Sale Price
W-2 Income
DISQUALIFYING DISPOSITIONS
6/30/05 $21.7600 $46.5000 7/2/05 62 $2,883.00 $1,349.12 1/2/04 $1,533.88
12/31/04 $21.7600 $39.0800 4/22/05 26 $1,016.08 $565.76 1/2/04 $450.32
12/31/04 $21.7600 $39.0800 1/8/05 100 $3,908.00 $2,176.00 1/2/04 $1,732.00
W-2 Income for Disqualifying Dispositions is the difference between the Total Value on the Purchase Date and the Total Purchase Price. $3,716.20
Select Tax Cuts and Jobs Act Highlights
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§ Higher AMT threshold§ Lower top tax rate (37%)§ Limitation on state taxes reduces likelihood of AMT§ Child tax credit available at higher income levels§ Consider allocation of planning fees and service offerings§ Increased estate tax and gifting limits§ Limitation on Net Operating Losses§ Limitation on business losses§ Increased charitable giving limits
§ 60% of AGI for cash contributed
Case Study #1: Single Taxpayer, Renter
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§ 34.5% effective tax rate increases to 36.0%
§ $45,643 increase in tax§ Bunch charitable
contributions
Case Study #2: Dual Income, No Kids
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§ 31.2% effective tax rate increases to 31.9%
§ $11,904 increase in tax§ Consider qualified
charitable distributions for IRA RMDs
Case Study #3: Family of Four
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§ 26.7% effective tax rate decreases to 26.6%
§ $814 decrease in tax§ Consider planning
stock transactions to qualify for child tax credit
Case Study #4: Single Investor
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§ 13.2% effective tax rate decreases to 12.1%
§ $8,049 decrease in tax§ Charitable contributions
lower effective rate by 10%§ Review factors driving AMT
and composition of investments to determine advantages under new law
Planning Opportunities and Pitfalls
§Residency Issues§10b5-1 Structuring§ ISO Exercise Timing§Wealth Transfer
§GRATs§ Irrevocable Trusts§CRTs§Donor Advised Funds
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For Further Reading
§Consider Your Options, Kaye A. Thomas§Bloomberg Tax: https://www.bna.com/tax§Forbes’ Tax Geek Tuesday:
www.forbes.com/sites/anthonynitti/§Forbes’ Taxgirl:
https://www.forbes.com/sites/kellyphillipserb/
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