Cost Basis Review and Update

Transcription

1 Cost Basis Review and Update

2 Our panel Gay Kaylor, Hershey Kevin McCosker, Pershing Andrew Schwartz, Computershare

3 Disclosure The following presentation and the views expressed by the presenters are not intended to provide legal, tax, accounting or other professional advice. The information contained in this presentation is general in nature and based on authorities that are subject to change. Applicability to specific situations should be determined through consultation with your legal and/or tax advisor. The information contained in these materials is only current as of the date produced. The materials have not been and will not be updated to incorporate any changes since the production date.

4 What is cost basis? All costs incurred to purchase a capital asset Example: Buy 100 shares of ABC at $30 per share, on July 1, 2017 $25 in fees Cost basis = (100 * $30) + $25 = $3,025 Beginning in 2011, transfer agents and brokers obligated to: retain cost basis amounts record the purchase date adjust shares and cost basis due to corporate actions transfer the information to a successor custodian report the basis on Form 1099 B when the shares are sold

5 Effective dates Some history January 1, 2011: stock/equities January 1, 2012: mutual funds and Dividend Reinvestment Plans (DRIPs) January 1, 2014: other securities (debt securities and options) Future: More complex securities?

6 Who is responsible? Transfer agents Brokers Custodians Issuers (self admin TA, or private)

7 Legislation trifecta Track, adjust, transfer, report cost basis (IRC 6045) Transfer statements (IRC 6045A) Any entity that has custody of securities Possibly even issuers CBRS (Cost Basis Reporting Service DTCC product) Corporate action reporting (IRC 6045B) Issuer requirement Required basis adjustments due to corporate actions

8 Why it s important Penalties assessed on Government Entities and Large Businesses with Gross Receipts of More Than $5 Million Time returns filed/furnished Not more than 30 days late (by March 30 if the due date is February 28) Returns due thru $50 per return/ $532,000* maximum 31 days late August 1 $100 per return/ $1,596,500* maximum After August 1 or Not At All Intentional Disregard $260 per return/ $3,193,000* maximum $530* per return/ No limitation * Adjusted for inflation The penalty for not filing a correct information return is separate from the penalty for not providing the correct payee statement.

9 Allocation methods Lot selection methods FIFO Specific ID Average Cost (Mutual funds/drp) BUY Jan $50 $ 500 BUY Feb $40 $ 800 BUY Mar $10 $ shares $1500 Sell 10 FIFO: Basis is $50/share Sell 10 $60, Specific ID from Feb lot: Basis is $40/share Sell 10 $60, Avg Cost: Basis is $30/share, FIFO from Jan lot

10 Qualifications Covered vs. noncovered securities Covered vs. noncovered accounts

11 Stock split Nontaxable event Acquisition dates remain the same Number of shares held increased by split ratio e.g. 2:1 split, number of shares held doubles Original basis allocated among new shares according to ratio e.g. 2:1 split, basis per share is halved

12 Stock split Before: BUY 1/2/17 10 $50 $ 500 BUY 2/1/17 20 $40 $ 800 BUY 6/1/17 20 $10 $ shares $1500 Issuer declares 2:1 Stock split, record date 3/20/18, payable date 4/15/18 After: BUY 1/2/17 20 $25 $ 500 BUY 2/1/17 40 $20 $ 800 BUY 6/1/17 40 $ 5 $ shares $1500 Adjust original lots by: doubling number of shares per lot Reducing basis per share by ½

13 Spin off Nontaxable event Acquisition dates remain the same Number of original shares remains the same Original basis allocated between old and new shares according to percentage e.g. 60% of original basis to old co., 40% to new co.

14 Spin off Before: Old Co. BUY 1/2/17 10 $50 $ 500 BUY 2/1/17 20 $40 $ 800 BUY 6/1/17 20 $10 $ shares $1500 Issuer declares spin off of New Co., 1 share of New Co. per 2 shares of Old Co. Record date 3/20/18, payable date 4/15/18. 60% of basis allocated to Old Co., 40% to New Co. After: Old Co. After: New Co. BUY 1/2/17 10 $30 $ 300 1/2/17 5 $40 $ 200 BUY 2/1/17 20 $24 $ 480 2/1/17 10 $32 $ 320 BUY 6/1/17 20 $ 6 $ 120 6/1/17 10 $ 8 $ shares $ shares $ 600 $1500

15 Employee plans For all employee awards: True cost basis = Purchase price + compensatory income For covered employee awards As of 2014, agents required to report only the purchase price Will create shareholder confusion, likely overpayment of taxes Transfers from administration system will sever links to data required for cost basis calculations

16 Employee plans Covered awards cash paid Stock options Employee stock purchase plans Noncovered awards no cash paid Restricted stock and RSUs Stock settled stock appreciation rights Any award paid in cash

17 Employee plans Covered awards cash paid Stock options Employee stock purchase plans Noncovered awards no cash paid Restricted stock and RSUs Stock settled stock appreciation rights Any award paid in cash

18 Stock options Exercise Date: February 15, 2016 Quantity: 100 shares ABC Co. FMV on exercise date $37/share Purchase Price: $30/share (strike price) Sale Date/Price: December 15, 2016 Sale Price $40/share Fees & commissions: $50

19 Stock options W 2 $700 Federal Earnings (100*($37 $30)) All applicable payroll withholding 1099 B $3,950 net sale proceeds $3,000 reported cost basis ($3,700 actual cost basis) $250 capital gain ($3,950 $3,700)

20 Broker issues Customer disputes Amount of basis recorded Customer disputes classification of security as covered/noncovered Matching to CBRS files control number mismatches Cost basis provided on paper Transfer method and effects on cost basis DWAC DRS Certificate deposits

21 Other issues Cost basis prior to 2011 ProBasis, GainsKeeper, estimation programs Shareholder responsible Possible solutions Shareholders need to keep their records! Certificates in broker name multiple underlying shareholders Future changes to law or CBRS?

22 Bond Regulations: Issues and Transfer Statements Contingent Debt Most contingent debt issued with the contingent payment due at maturity. During the life of the bond, the investor is required to pay that projected contingent debt as OID. This can drive the cost of the bond above par. At maturity, if the contingent payment is less than the projected payments, the investor will end up with a loss. Variable Rate Bonds To calculate the amortization of a variable rate bond, you need to know the last payment rate of the bond on the date it was purchased. This will cause issues for some firms that do not have an extensive coupon rate table or with thinly traded bonds. Foreign Debt Exchange rates are required and some firms use different dates when converting the bonds from currency to USD.

23 What Is the Importance of IRC Section 871(m)? IRC Section 871(m) Effective January 1, 2017, The industry was required by the IRS to apply withholding tax on deemed dividends when in scope securities are held by non U.S. resident clients per Section 871(m) of the IRC. Some in scope instruments include long purchases of U.S. equity based NPCs and ELIs that reference an underlying U.S. equity. Covered: Options Warrants Futures Derivatives (over certain index options) Equity linked Notes Convertibles Forwards Contract for difference (CFDs) Structured Products

24 IRC Section 305(c) Changes to Withholding Tax and Mutual Fund Reporting IRC Section 305(c), which is not new, received renewed interest and heightened sensitivity when 871(m) was announced. Section 305(c) authorizes the Secretary to prescribe regulations to treat changes in the conversion ratio of instruments convertible into stock and other events having similar effects as distributions to shareholders whose proportionate interests in the assets or earnings and profits of the corporation are increased by such events.

25 Wash sales BUY 2/1/ $50 = $ 5,000 SELL 3/31/ $45 = $(4,500) Results in $500 loss BUY 4/3/ $47 = $ 5,640 Result: Disallowed loss added to basis of repurchased shares Adjust holding period of repurchased shares Create sublots BUY 2/4/ $52 = $ 5,200 BUY 4/3/17 20 $47 = $ 940

26 Q&A

27 Gay Kaylor Kevin McCosker Manager, Stockholder Relations Managing Director The Hershey Company Pershing LLC (717) (321) Andrew Schwartz, CPA, CEP Senior Manager Computershare Tel: