sos educational webcast: cost basis conundrums – crafting ...• communication tips & tricks...

Stock & Option Solutions, Inc. September 16, 2014

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SOS Educational Webcast:

Cost Basis Conundrums –

Crafting Clear Communications

Moe Zohny, CEP, Stock & Option Solutions, Inc.

Andrew Schwartz, CPA, CEP, Computershare

Disclaimer

• The following discussion and examples do not necessarily represent the official views of Stock & Option Solutions, Inc., or Computershare, with respect to any of the issues addressed. Moreover, this presentation and the views expressed by the individual presenters should not be relied on as legal, accounting, auditing, or tax advice. The outcome of any individual situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of the relevant literature in effect at the time.

• Anyone viewing this presentation should not act upon this information without seeking professional counsel and/or input from their advisors.


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Materials Slides

http://www.sos-team.com/pdfs/cost_basis_reporting.pdf

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Agenda

• Objective

• Cost Basis Overview

• Survey Data

• Cost Basis Reporting as of 2014

• What is “tax advice”?

• Communication Tips & Tricks

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Objective

• Understand newest challenges in cost basis

reporting

• Provide some effective ideas on how to

educate employees about cost basis

• Hopefully prevent employees from

overpaying taxes on stock compensation

– Thereby helping to preserve value of stock comp

for the employee population

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What is Cost Basis?

• Example:– Purchase 100 shares of ABC at $34 per share on Nov 18, 2014

• Pay $25 in fees to purchase shares

– Cost basis = (100 * $34) = $3,400 + $25 = $3,425

• Transfer agents and brokers were historically not obligated to:

– Retain cost basis information

– Retain purchase date

– Make adjustments due to corporate actions (stock splits)

– Transfer information to a successor broker

– Report basis on Form 1099-B when shares are sold

• As of 2011, this changed…


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What is Cost Basis?

• For Stock Plan Securities: “real cost basis”

also includes “what you’ve paid taxes on”

– (AKA “Ordinary Income” or “Compensation

Income”)

– Included as W-2 income and/or taxes withheld

• Originally, brokers had a choice:

– Report “real cost basis”

– Report just the cash paid

Effective 2014, the IRS changed the rule again…

Required Basis Reporting for Stock Plan Shares

Type Actual Cost Basis Required to

Report

ISOs QD: Exercise Price

DD: Gain: min(MV at Exercise, Sales Price)

Loss: Exercise Price (if exercise price >

sales price)

Exercise Price

NQs Market Value at Exercise Exercise Price

SSARs Market Value at Exercise Non-covered

RSA Market Value at Vest1 Non-covered

RSU Market Value at Release Non-covered

423 ESPP QD: Price Paid + Ordinary Income

DD: Market Value at Purchase

Purchase Price

NQ ESPP Market Value at Purchase Purchase Price

1 if 83(b) filed, cost basis is market value at grant.


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SURVEY DATA

Survey Overview

• Survey conducted by SOS in August /

September 2014

• 105 responses from issuing firms

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6

Industry

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0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1%

3%

1%1%

1%

13%

4%

14%11%

6%

42%

1%

US Region

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0%

10%

20%

30%

40%

50%

60%

10%

1% 4% 4% 3%

54%

15%

7%1%


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Rate Biggest Challenges: How

Concerned Are You About…

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0

0.5

1

1.5

2

2.5

3

3.5

4

Sales of ESPP

shares in the

plan

Sales of ESPP

shares

moved to an

outside

broker

before sale

Cashless

sales of stock

options

Stock Swaps Tracking and

calculating

wash sales

Corporate

actions

(splits, spin

offs, return

of capital)

Restricted

stock (83(b),

sell-to-cover)

SAR

exercises

and tracking

cost basis of

shares

*Ratings on a scale of 4 (very concerned) to 1 (not

concerned)

Do you use a dedicated broker to

administer your plan?

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25.00%

75.00%

No

Yes


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Is your broker planning

communications to participants due to

cost basis reporting change?

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11%

23%

66%

Yes

No

I don't know

What type are the communications?

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38%

38%

25%

Provide basic communications

that employees should

examine their cost basis which

will likely require adjustment

for capital gains and losses.

Provide detailed

communications with

examples of how to adjust

cost basis

Provide individualized

statements to employees with

the exact adjustments they

must make for each lot sold.


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COST BASIS REPORTING UNDER

2014 REGULATIONS

NQ Stock Option: Same-day Sale Exercise

Exercise date: December 15, 2014

Quantity: 100 shares company stock

FMV on exercise date $40/share

Option cost: $30/share

Sale Date/Price: December 15, 2014

Sale Price $40

Fees & commissions: $50

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• W-2

– $1000 Federal Earnings =100*($40 - $30)

• 1099-B

– $3,950 net sale proceeds

– $3,000 reported cost basis = Exercise Price

($4,000 actual cost basis)

– $50 capital loss ($3,950 - $4,000)

2014 Tax Reporting

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2014 1099-B

ACME Transfer Agency

111 Exchange Place

Jersey City, NJ 07000

99-9999999 xxx-xx-6789

Tom Edison

123 Valley Road

West Orange, NJ 07000

123456A10

100 shares of ABC Company

12/15/201412/15/2014

3,950 3,000

XX

X

A

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• Capital gains/losses

– Reported on Form 8949

– Six varieties of Form 8949 (ST/LT, CB

reported/not reported, 1099-B Y/N)

– 1099-B information requires adjustment

– Transfer information to Schedule D

Participant Tax Reporting

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Form 8949

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Schedule D

Disqualified §423 Sale Example

Purchase date: February 15, 2014

Quantity: 100 shares company stock

FMV on purchase date $37/share

Purchase price: $30/share

Sale date/price: December 15, 2014

Sale price $40

Fees & commissions: $50

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13

• Form 3922

• W-2– $700 Federal Earnings 100*($37 - $30)

• No withholding

• No Social Security/Medicare

• Possible state tax consequences

• 1099-B– $3,950 net sale proceeds

– $3,000 reported cost basis ($3,700 actual cost basis)

– $250 capital gain ($3,950 - $3,700)

– Covered vs. non-covered sales

…for every single lot sold

2014 Tax Reporting

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2014 1099-B

ACME Transfer Agency

111 Exchange Place


99-9999999 xxx-xx-6789

Tom Edison

123 Valley Road

West Orange, NJ 07000

123456A10

100 shares of ABC Company

12/15/20142/15/2014

3,950 3,000

XX

X

A

W if Wash SaleAmount of disallowed

loss

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Form 8949

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Schedule D


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Corporate Actions

Example:

FMV at beginning of offering period $40

FMV at end of offering period $50

Discount: 15% with look-back

Purchase price $34

After 2:1 stock split:

FMV at beginning of offering period $20

FMV at end of offering period $25

Purchase price $17

�for every covered lot purchased in the plan

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Other Possible Corporate Actions

• Reverse stock split

• Stock dividend

• Spin-off

• Merger

• Cash/Stock combination

• Return of capital

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Wash Sales

BUY 2/1/14 100 shares @ $50 = $5,000

SELL 3/31/14 100 shares @ $45 = $4,500

$500 loss

BUY 4/3/14 120 shares @ $47 = $5,640

Result:

Disallowed loss added to basis of repurchased shares:

Adjust holding period of repurchased shares

Create sub-lots

BUY 2/4/14 100 shares @ $52 = $5,200

BUY 4/3/14 20 shares @ $47 = $ 940

…especially for ESPPs with monthly purchases or dividend reinvestment

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COMMUNICATION TIPS


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What is tax advice?

• Tax Advice

– Specific to the individual

– Decision between courses of action

• Tax Information

– Facts that apply to everyone

– Disclosing what will happen when taking an

action

– Issues participants should consider

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Communication Tips

• Talk to your broker(s)!

• Get a sample of planned communications, if any

– Review with your legal team• Assess comfort level – is more needed or less?

– Will broker(s) allow customization? If not, can you “turn off” this communication?

– What will be shown on the participant website?

• If more is needed (or nothing planned), discuss general approach with legal before drafting

– Don’t waste time drafting details that legal won’t approve

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More Tips

• Use consistent terminology

– Even if you don’t agree with the broker website language, be consistent

– Will avoid a great deal of participant confusion/calls to stock plans department

• For simple situations, mail merge may be an excellent solution if you want to provide individualized cost basis information

– E.g. non-qualified ESPP – taxed at purchase

– Some may have concerns over accuracy of data if a more complex calculation is involved

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More Tips

• Webcasts– Live webcasts

• Be prepared to take questions re: employee-specific situations off line

• Keep them short

– Prerecorded web sessions, embedded in stock plan webpage

• Live sessions– Include examples (your vendor may have examples you can

use…)

• FAQs– Glossaries can be helpful

– Keep to less than three pages, if possible

– Pictures help

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Communication Strategies

• Do Nothing– Possible employee relation issues

– Can detract from benefit of equity plans (especially for broad-based plans and ESPPs)

– Some due diligence is necessary to ensure cost basis and cost basis rules are accurately reported and generally available consistently across vendor website, plan document, plan prospectus and/or award agreements

• E.g. Discrepancies between how “spread” is calculated (average/closing price, etc.)

• Send General Warning Letter– Good minimalist strategy

– May generate more questions than it answers

– Need to ensure participants have a way to access their cost basis information

• Same due diligence rules apply as in example above

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..More Communication Strategies

• Provide Comprehensive FAQ– Prior buy-in from Legal and final Legal Review of FAQ is

recommended

– Shows a concerted effort towards participants’ financial well-being

– May be able to leverage resources from other sources

• Be A Hero – Provide Cost Basis Information– Prior buy-in from Legal strongly recommended

– Greater risk of providing inaccurate information and potential liability if wrong basis distributed

– May be labor intensive without the proper tools or technology

– Much more effective when instructions are included on how to use the information (i.e. FAQs or basis adjustment guide)

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Other Resources

• http://www.mystockoptions.com– Geared toward participant

– Great examples, great articles

– Some vendors license the content, so available to participants as part of provider service package

• NASPP– Portal:

http://www.naspp.com/members/Portal/Cost-Basis/

– Detailed flowcharts for most equity types (NQ,RS, RSU, ISO/ESPP)

– Examples (NQ, ISO, RSU, etc.)

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Contact Information

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Andrew Schwartz, CPA, CEP

Vice President

480 Washington Blvd – 27th Floor


Bus: 201-680-3340

Email: [email protected]

Moe Zohny, CEP

Equity Compensation Consultant

910 Campisi Way, Suite 2E

Campbell, CA 95008 USA

Bus: (408) 979-8700

E-mail: [email protected]

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