Certified Equity Professional Institute

Transcription

1 Exam Overview Webinars Certified Equity Professional Institute L2 Exam Overview Webinar Taxation Certified Equity Professional Institute The information presented herein is of a general nature and has been simplified for presentation to a large audience. It is not a complete discussion of all aspects the laws, rules, regulations, standards, and principles that govern equity compensation plans. The contents are neither designed nor intended to be relied upon, and should not be considered, as legal, tax or accounting advice. Your specific situation may involve circumstances that cause the laws, rules, regulations, standards and principles described herein to apply differently. You should consult your own advisors before deciding what, if any, course of action to take in your own particular situation.

2 Taxation 26% of test Responsible for all prior taxation topics Review all Level One topics Syllabus IRC Section 409A IRC Section 422 IRC Section 6039 Tax deposit timing -2-

3 IRC 162(m) Public companies only Tax deduction on compensation paid to employees $1 million limit on deduction of compensation $500K limit for certain industries Applies to: CEO Top three highly compensated (covered employees) excluding CFO Exemption Performance-based compensation Safe harbor for stock options Committee of outside directors Plan specifies who is eligible Maximum share limit to a single individual Grants issued at FMV Plan approved by shareholders -3-

4 IRC 162(m) Instrument application Most stock options are performance-based Gain does not have to be counted against the limit RSA/RSU typically does count against the limit Granted at a discount Unless performance condition inherent in the plan Check when accelerating Is it still performance-based? -4-

5 Section 409A American Jobs Creation Act of 2004 Deferred compensation Broad definition Encompasses stock options Exceptions ISOs & ESPPs NSOs Granted at market value No deferral features other than exercise right Other requirements Service recipient stock -5-

6 Section 409A Short-term deferrals Less than 2.5 months after end of year of vest If not exempt must comply Timing of deferral elections Initial election Made before start of taxable year in which the award would vest IF made in the first year of the award, within 30 days after the employee first becomes eligible Performance-based may be made up to 6 months before end of performance period Once deferred no accelerations of payout Additional elections Must be made at least 12 months before receipt of deferred compensation In most cases must be for at least 5 years after original date Permissible distribution events Separation from service Key employees includes 6-month waiting period Disability, death, change in control, unforeseeable emergency Specified date or dates (fixed schedule) -6-

7 Section 409A If not compliant Taxed at vest AND 20% penalty and interest Other concerns Dividends Unvested options, SARs, RSUs = discount Dividend equivalent right Taxed as ordinary income at payment Withholding required Company tax deduction Private companies Valuation is critical to avoid discount Modifications -7-

8 Incentive Stock Options Modifications Any change that provides additional benefits to the optionee is considered a cancellation and regrant of the ISO, except: Acceleration of exercisability Assumption or substitution of new ISO upon merger or acquisition, provided: Aggregate intrinsic value and ratio of the exercise price to market value remain the same No additional benefits are provided to optionee If modification is viewed as a cancellation and a regrant, the new grant must meet the ISO requirements Exercise price $100,000 limitation If new grant doesn t meet ISO requirements, it is immediately ineligible for ISO treatment -8-

9 Incentive Stock Options Modifications (cont.) Common transactions that will be viewed as a modification Repricing Extension of expiration date Extension of period to exercise after termination Addition of financing methods for exercise purposes Note: Modifications do NOT result in immediate disqualification of the ISO. The option is disqualified from ISO treatment ONLY if the new grant does not meet the ISO requirements. It is possible that, due the $100,000 limitation, only a portion of the ISO will be disqualified. Note that any change that occurs pursuant to the original terms of the option is not a modification -9-

10 ISO Advanced Topics Extension of exercise period Modification for both tax and accounting purposes Extension of expiration date Cancellation and regrant Need to retest ISO rules & limits Granted at current market value? Employee? $100,000 limit? Extension of post-termination grace period Cancellation and regrant Need to retest ISO rules & limits Granted at current market value? Employee? $100,000 limit? Any exercise past 3 months (or shorter originally stated period) receives NSO treatment -10-

11 Incentive Stock Options Acceleration of vesting Generally is not viewed as a modification Acceleration could cause option to exceed the $100,000 limitation (assuming the ISO is exercisable only upon vesting) On October 1, 2013, an employee is granted an ISO to purchase $160,000 worth of shares vesting in four annual installments ($40,000 worth of shares are vesting per year). In 2015, vesting is accelerated for all remaining unvested shares. Value of shares becoming exercisable per year before the acceleration: After the acceleration $40,000 $40,000 $40,000 $40, $40,000 $120,000 $0 $0 $20,000 shares are disqualified from ISO status as a result of the acceleration. -11-

12 ISO Advanced Topics Change in employment status ISOs can only be granted to employees ISOs only retain preferential tax treatment for 3 months after termination If vesting continues after termination Shares vesting after termination are NSO Shares retaining ISO status (vested at termination) have limited grace period to retain beneficial tax treatment -12-

13 ISO Advanced Topics M&A Corporate transactions not a modification Proportional adjustment Stock split or merger ratio To retain ISO status, the employee should receive no additional benefits -13-

14 Dividends on Restricted Stock Dividends Paid on payable date Income and Withholding No Section 83(b) election made Taxed as ordinary income at payment of dividend Withholding required W-2 / 1099-MISC Reportable Company tax deduction Section 83(b) election made Treated as dividend income Reported on 1099-DIV Uncertainty if not paid until underlying award vests 2015 Certified Equity Professional Institute cepi.scu.edu -14-

15 Dividend Equivalents on Restricted Stock Units Dividend Equivalents Paid when underlying shares are released Income and Withholding FICA/FUTA due at vesting Taxed as ordinary income at payment of dividend Withholding required W-2 / 1099-MISC reportable Company tax deduction 2015 Certified Equity Professional Institute cepi.scu.edu -15-

16 Tax Considerations Employer s tax deduction Generally equal to income reportable on employee s Form W-2 (or nonemployee MISC) NSO Vested exercise: equal to spread at exercise Unvested exercise: equal to spread at vest (or exercise, if Section 83(b) election is filed) Restricted stock No section 83(b) election: equal to spread at vest Section 83(b) election: equal to spread at grant/purchase -16-

17 Tax Considerations Employer s tax deduction (cont.) ISO Deduction for ISO disqualifying disposition conditioned upon proper reporting Disqualifying disposition: equal to lesser of spread of at exercise (spread at vest if option was exercised prior to vesting) or actual gain on sale Qualifying disposition: none ESPP Deduction for ESPP disqualifying disposition conditioned upon proper reporting Disqualifying disposition: equal to spread at purchase (ordinary income) Qualifying disposition: none -17-

18 Loans & Promissory Notes Must be full-recourse note Employee must be liable - secured Must charge at least minimum interest required by Code If less than federal applicable rate, IRS will treat part of repayment as imputed interest If interest is imputed, it reduces the amount of the principle, thus effectively reducing the price of the options Discounted option Disqualifies ISOs 409A issues ISO must have specific provisions to allow Loan forgiveness Income to employee -18-

19 Special Circumstances Transferable options Allows employee to transfer option to family members, etc. prior to death Only available for NSOs 1 Taxation Gift tax at transfer: Employee subject to gift tax equal to fair value of option at the time of transfer If option is unvested, fair value for gift tax purposes is computed at vest Income tax at exercise: Employee recognizes ordinary income when the option is exercised Standard withholding and reporting obligations apply 1 (with one very narrow exception for transfers to a specific sort of trust) -19-

20 Special Circumstances Death ISO Transfer of shares exercised prior to death is not considered a disposition ISO holding periods no longer apply For ISOs that are exercised after the employee s death: Estate will receive a stepped-up basis in the stock equal to exercise price and fair value of option at employee s death AMT may apply ESPP Generally right to participate in ESPP is terminated upon death of the employee and any unused contributions are refunded to the estate Transfer of ESPP shares upon death of employee is treated as a qualifying disposition -20-

21 Special Circumstances Divorce NSO Transfer of option pursuant to divorce is not a taxable event Ex-spouse recognizes ordinary income upon exercise Income taxes and FICA/FUTA must be withheld Income taxes (and income) are reported on Form 1099 issued to the spouse FICA/FUTA taxes are based on employee s income, attributed to employee, and reported on employee s Form W-2 (but are paid by the ex-spouse) ISO Transfer of ISO shares acquired prior to divorce is not a disposition and exspouse is eligible for preferential treatment if holding periods are met Transfer must be incident to divorce (i.e., be within 1 year of divorce) Transfer of option disqualifies it from ISO treatment -21-

22 Stock Appreciation Rights Tax treatment Amount paid to employee upon exercise (cash or value of stock) is treated as ordinary income If paid in stock, employee recognizes capital gain upon subsequent sale of stock Gain is equal to sale price less income recognized at exercise Long-term capital gains holding period begins at exercise Company responsibilities Withholding (employees only) Reporting (Form W-2 for employees, Form 1099-MISC for non-employees) Employer tax deduction for income recognized by employee Any ordinary income recognized on an SAR is subject to withholding and W-2 reporting Certified Equity Professional Institute cepi.scu.edu -22-

23 Educational Courses to Assist In Exam Preparation NASPP NCEO Although the CEP Institute makes this information available to candidates, we do not endorse educational programs. The candidate must determine whether the program is suitable for his/her needs. -23-