Tax practitioners should be aware of how to treat their clients’ tax and sales requirements of employee stock purchase plans (ESPP). Here’s a primer on what you need to know.
Let’s review the terms that we will be using to better understand what is taking place here:
- An ESPP is a type of broad-based stock plan, run by a company, that permits employees to use payroll deductions, accumulated over a specific purchase period, to acquire stock from the company, generally at a discount. The amount of the discount is dependent on the company’s plan, but the maximum discount is 15 percent.
- Cost basis is the original value of an asset for tax purposes and is usually the purchase price. For example, how much did your client pay for the stock?
- The holding period is the amount of time the investment is held by an investor, or the period between the purchase and sale of a security. Here, you’ll want to know how long they held the stock.
- A capital gain is the result when an asset, such as a security, is sold for more than the purchase price. In other words, did the sale make money? Conversely, if the proceeds of the sale were less than the purchase price, then you would have a capital loss where they lost money on their investment.
And a few ESPP date terms:
- The grant date or offering date is usually the first date of the offering period in an ESPP. This date applies for all the participating employees. This is when payroll deductions start.
- The purchase or exercise date is the date on which employee contributions are used to purchase stock.
Offering Periods and Purchase Dates
Let’s look at a typical six-month offering period with two purchase dates, March through September. The enrollment period starts before the offering period. In our case, the enrollment period may be Feb. 15-28 or 29 for the offering period of March 16-Sept. 15.
- March 16 is the offering date or grant date, and is when the offering and salary deductions begin. Generally, there is an equal amount taken out of wages from each of the employee’s paychecks during this period, accumulating until the purchase date.
- June 15 is the purchase date. Stock is purchased at this time using the funds that were taken from employee paychecks.
- Sept. 15 is the second purchase date for purchasing stock in our six-month example. During the previous three-month purchase period, funds were withheld from a client’s wages. This is also the end of the six-month offering period.
Qualifying and Disqualifying Dispositions
A sale of ESPP securities is considered to be a qualified disposition when the stock is sold over two years after the offering date and over a year after the purchase date.
If the ESPP securities are sold either within two years of the offering date or within a year of the purchase date, the sale is considered a disqualified disposition. A qualified disposition may result in preferential tax treatment.
How to Report the Sale of ESPP Securities
To report the sale of ESPP securities, you will need the following:
- The W-2. If you can obtain the detailed W-2, it might show the ESPP disqualified disposition. The additional amount may be in Box 14.
- The 1099-B or equivalent form (1099 Consolidated Statement) from the brokerage firm that sold the securities.
- Based on what’s been reported (or not reported) on the W-2, you may also want plan documents, such as Purchase Statements and Trade confirmations.
How to Calculate the Sale
- Use your capital gains or losses worksheet or similar data entry in Intuit® ProConnect™ Tax Online, Lacerte® or ProSeries®.
- If the sale occurred more than two or more years after the grant date, you will have a qualified disposition. Find the original stock purchase price, or the basis, on your client’s 1099-B. Now check the box; the transaction was reported to the IRS with basis. Move down to description of property, and enter either the name of the stock or the stock symbol, and the number of shares they sold. On date acquired, enter the day your client purchased the stock. Enter “various” in the field if they purchased stock on more than one day. In date sold, enter the day the stock was sold, stated on your client’s 1099-B.
- Enter the amount reported on the 1099-B Sales Price. Normally, the fees and commission have already been deducted from this amount, but you may need to verify this. Move to cost or other basis, and report the amount stated on the 1099-B. Now, compute the amount they paid for the stock by multiplying the number of shares by the cost per share, and then add in the income reported on their W-2 to get the actual total cost. Enter it on the Corrected Basis line.