The conference committee charged with aligning the Senate and House versions of the Tax Cuts and Jobs Act announced late last week that they have come to an agreement. The final bill is expected to be approved in both the House and Senate this week and then signed into law by the president.
Here’s where the bill ended up with respect to the provisions that impact stock compensation.
Individual Tax Rates: The final version of the bill released by the conference committee largely matches what was in the Senate version, except that the maximum individual tax rate is reduced to 37%. So we end up with seven individual tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The highest rate kicks in at $500,000 of income for single taxpayers but at only $600,000 for joint filers (instead of the $1 million threshold that was originally proposed). The individual tax rates sunset after 2025 and will revert back to the current rates at that time.
Supplemental Withholding Rate: For employees who have received supplemental payments of $1 million or less during the year, the supplemental rate is tied to the third lowest individual tax rate, which will be 22% under the aligned bill. For employees who have received supplemental payments of more than $1 million during the year, the rate is tied to the maximum individual tax rate, which will be 37%.
AMT (for Individuals): This is probably the closest we’ve come to a repeal of the AMT (at least in my memory) but still no cigar. The bill does increase the exemption amounts and phaseout thresholds, so fewer taxpayers will be subject to the AMT. These changes sunset after 2025.
Corporate Tax Rate: Reduced to 21% with no sunset.
Estate Tax: Increases the estate tax threshold to about $11 million; no repeal and no sunset.
- The CFO is once again subject to 162(m).
- Anyone serving as CEO or CFO during the year is also subject to 162(m) (instead of just the individuals serving in those roles at the end of the year).
- Once a covered employee for a company, always a covered employee for that company.
- Stock options and performance awards will no longer be exempt from the deduction limitation.
- Includes an exemption for compensation paid pursuant to a written, binding contract (such as a stock option or award agreement) in effect as of November 2, 2017, if not modified after that date.
Qualified Equity Grants: The final bill includes a provision that would allow employees in privately held companies to elect to defer tax on stock options and RSUs until five years after the arrangements vest, provided certain conditions are met.
Stock Options and RSUs: No change to the current tax treatment of stock options, SARs, or RSUs. The provision that would have taxed these arrangements at vest was removed from both versions of the bill before it was passed by House and Senate.
Determination of Cost Basis: No change from current law. The Senate version of the bill would have required identification of securities sold to be on a FIFO basis but this is not included in the final bill.
Tags: 162(m), cost basis, Section 162(m), tax basis, tax reform
In just a couple of weeks, employees will begin receiving Forms 1099-B for sales they conducted in 2015. Here are five things they need to know about Form 1099-B:
- What Is Form 1099-B? Anytime someone sells stock through a broker, the broker is required to issue a Form 1099-B reporting the sale. This form is provided to both the seller and the IRS. It reports the net proceeds on the sale, and in some cases, the cost basis of the shares sold. The seller uses this information to report the sale on his/her tax return. [Same-day sale exercises can be an exception. Rev. Proc. 2002-50 allows brokers to skip issuing a Form 1099-B for same-day sales if certain conditions are met. But your employees don’t need to know about this exception unless your broker isn’t issuing a Form 1099-B in reliance on the Rev. Proc.]
- The Cost Basis Reported on Form 1099-B May Be Too Low. For shares that employees acquire through your ESPP or by exercising a stock option, the cost basis indicated on the Form 1099-B reporting the sale is likely to be too low.
- Sometimes Form 1099-B Won’t Include a Cost Basis. If employees sold stock that was acquired under a restricted stock or unit award, or if they acquired it before January 1, 2011, the Form 1099-B usually won’t include the cost basis (although procedures may vary, so check with your brokers on this).
- What To Do If the Cost Basis Is Incorrect (or Missing). If the cost basis is incorrect, employees will need to report an adjustment to their gain (or loss) on Form 8949 when they prepare their tax returns. If the basis is missing, they’ll use Form 8949 to report the correct basis.
- An Incorrect Cost Basis Is Likely to Result in Employees Overpaying Their Taxes. It is very important that employees know the correct basis of any shares they sold. They will subtract the cost basis from their net sale proceeds to determine their taxable capital gain (or deductible capital loss) for the sale. Reporting a cost basis that is too low on their tax return could cause them to pay more tax than necessary. In some cases, this doubles their tax liability. The only person who wins in this scenario is Uncle Sam; your employees lose and you lose, because no one appreciates the portion of their compensation that they have to pay over to the IRS. Your stock compensation program is a significant investment for your company; don’t devalue the program by letting employees overpay their taxes.
Employees should review any Forms 1099-B they receive carefully to verify that the cost basis indicated is the correct basis. If it is missing or incorrect, they should use Form 8949 to report the correct basis.
Check out the NASPP’s new sample employee email “Five Things You Need to Know About Form 1099-B.” Also, check out these other handy resources in the NASPP’s Cost Basis Portal and use them to develop your own educational materials:
The Portal also has examples and flow charts, all of which have been updated for the 2015 tax forms. [In case you are wondering, there were no significant changes to Form 1099-B, Form 8949, or Schedule D in 2015.]
Tags: cost basis, employee education, Form 1040, Form 1099-B, Form 8949, IRS, Schedule D, stock plan education, tax return
Our first discussion of cost-basis reporting was posted back in 2009, yet, here we are, still talking about it half a decade later.
Why Am I Still Blathering On About This?
This is still a topic for discussion because the rules have changed again this year. For any shares acquired on or after January 1, 2014, brokers are no longer allowed to voluntarily include the compensation income recognized in connection with the option or award under which the stock was acquired in the cost basis reported on the Form 1099-B issued for the sale. This means that for any shares employees acquired under their options and awards this year, the cost basis reported on Form 1099-B is likely to be too low. Employees will have to report an adjustment on Form 8949 when they file their tax return to correct their capital gain/loss for the underreported basis.
When you sell stock, your cost basis in the stock is subtracted from your net sale proceeds to determine what your capital gain or loss is. For shares acquired under stock awards, your cost basis is the amount you paid for the stock, plus any compensation income recognized in connection with the acquisition (in the case of NQSOs and restricted/units) or disposition (in the case of ISOs and ESPPs) of the stock.
Brokers have been required to report a cost basis on Form 1099-B since 2011. Previously, brokers were allowed to voluntarily include the compensation income recognized in connection with the award in the reported cost basis. This was good because it meant that sometimes the basis reported on Form 1099-B was correct, making it easy in those instances for employees to report their sales on Schedule D and calculate the correct capital gain/loss. But it was also bad because there was no way to tell, when looking at Form 1099-B, whether the reported basis included the compensation income or not. The end result was a lot of confusion and possibly a lot of over-reported capital gains.
Where Are We Now
You might think the IRS would fix this problem by making brokers indicate whether the basis reported on Form 1099-B includes the compensation income. But you would be wrong. Instead, the IRS decided that the basis reported on Form 1099-B should only be the purchase price. This way everyone knows what basis is reported on Form 1099-B. It’s the wrong basis in most cases, but at least we know what it is. That’s a step in the right direction, I guess.
To make things more confusing, for shares acquired before January 1, 2014, brokers can still voluntarily include the compensation income in the basis reported on Form 1099-B (and still can’t indicate on the form if they’ve done this). And, for option grants, brokers can treat the grant date as the acquisition date. I think that most brokers are planning to apply the new rules to everything, regardless of when the shares were acquired/option was granted, but you should check with your brokers to verify what they are doing.
What This Means for Employers
Forms 1099-B will be issued around mid-February. You should plan on distributing some educational material to employees to explain this. The NASPP webcast “The New Forms 1099-B Are Coming! Are You Ready?” will provide more information on the topic. In addition, we’ve updated all the sample forms, flow charts, and FAQs in our Cost-Basis Reporting Portal for the new rules and the 2014 forms. New this year, we’ve added Cost Basis Cheat Sheets, featuring flow charts explaining how to calculate the adjusted cost basis for most types of stock awards.
Tags: 1099-B, capital gains, cost basis, Form 8949, Schedule D, tax basis, tax return