Transcripts From the IRS

Disclaimer: The content is drawn from a variety of sources, including (but not limited to) articles, Internal Revenue Code and Regulations, Court cases, articles, and other unofficial resources. 

Transcripts from the IRS are often an important resource when working with taxpayer issues. Because of identity theft and other information sabotage, the IRS quit providing transcripts with important taxpayer information – like Social Security numbers, account numbers and other key data – by means of redacting (covering or removing) that information. 

Needless to say, there was a lot of push back from taxpayers and tax professionals alike. The IRS has responded by providing procedures to allow access to what has been redacted. The latest information can be found on irs.gov — https://www.irs.gov/individuals/about-the-new-tax-transcript-faqs. 

I’ll post some of the information from that link, but you should get a copy, read it thoroughly, and keep it handy. Note: This procedure is only for individual taxpayer transcripts. 

Here’s what is visible on the new tax transcript: 

  • Last four digits of any SSN listed on the transcript: XXX-XX-1234 
  • Last four digits of any EIN listed on the transcript:  XX-XXX1234 
  • Last four digits of any account or telephone number 
  • First four characters of the last name for any individual (first three characters if the last name has only four letters) 
  • First four characters of a business name 
  • First six characters of the street address, including spaces 
  • All money amounts, including wage and income, balance due, interest and penalties 

The IRS stopped faxing most transcripts on 6/28/2019. It also stopped third-party mailing in connection with transcript requests (4506 series).  Third parties were the tax resolution firms who got transcripts for taxpayers while working out tax debt solutions. 

Tax professionals with proper authorization may now request unmasked Wage and Income Transcripts through the Transcript Delivery System (TDS). The tax professional must have authorization (Form 2848, Power of Attorney or Form 8821 Tax Information Authorization). 

If you need an unmasked Wage & Income transcript, you may contact the Practitioner Priority Service line. If you have taxpayer authorization, but it’s not on file, you can fax the authorization to the IRS assistor (while you remain on the line with them). The IRS assistor will then send the transcript(s) to your Secure Object Repository (SOR), available through e-Services. Tax professionals must have an e-Services account and pass Secure Access authentication to use the SOR option. 

Transcripts will remain in the SOR for a limited time and automatically be removed after three days once you view it or after 30 days if it is not viewed.  Print or save the transcript if you want to keep a copy. 

Unenrolled practitioners must either be responsible parties or delegated users on the E-File application. EAs, CPAs, and attorneys are considered enrolled practitioners. 

Alternatively, taxpayers or other third parties who require an unmasked transcript for tax return preparation or filing may contact the IRS, present proper authentication to prove their identities and an unmasked transcript will be mailed to the taxpayer’s address of record. 

Resources

Non-qualified Stock Options

Non-qualified Stock Options

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]For today we’re talking about an option granted (given) to the taxpayer by the employer. The option specifies when it can be exercised and price of the shares that are being exercised (bought). Summary: this is an employee benefit and usually found in larger companies as a method of compensation – and that’s key since compensation is taxable.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]A stock option, in general, is something a taxpayer can posses that allows the purchase of a stock of a company. To get possession of the stock, the taxpayer must exercise the option, which simply means they buy the stock under the terms of the option.

For today we’re talking about an option granted (given) to the taxpayer by the employer. The option specifies when it can be exercised and price of the shares that are being exercised (bought). Summary: this is an employee benefit and usually found in larger companies as a method of compensation – and that’s key since compensation is taxable.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]Hmmmmm. What do you mean “exercised”? Let’s step back and provide some background.

A stock option, in general, is something a taxpayer can posses that allows the purchase of a stock of a company. To get possession of the stock, the taxpayer must exercise the option, which simply means they buy the stock under the terms of the option.

For today we’re talking about an option granted (given) to the taxpayer by the employer. The option specifies when it can be exercised and price of the shares that are being exercised (bought). Summary: this is an employee benefit and usually found in larger companies as a method of compensation – and that’s key since compensation is taxable.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]Non-qualified stock options [NQSO] can be a complex area of tax preparation. Why are they called non-qualified? Because they are immediately subject to tax when exercised.

Hmmmmm. What do you mean “exercised”? Let’s step back and provide some background.

A stock option, in general, is something a taxpayer can posses that allows the purchase of a stock of a company. To get possession of the stock, the taxpayer must exercise the option, which simply means they buy the stock under the terms of the option.

For today we’re talking about an option granted (given) to the taxpayer by the employer. The option specifies when it can be exercised and price of the shares that are being exercised (bought). Summary: this is an employee benefit and usually found in larger companies as a method of compensation – and that’s key since compensation is taxable.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]Disclaimer: The content is drawn from a variety of sources, including (but not limited to) articles, Internal Revenue Code and Regulations, Court cases, articles, and other unofficial resources.

Non-qualified stock options [NQSO] can be a complex area of tax preparation. Why are they called non-qualified? Because they are immediately subject to tax when exercised.

Hmmmmm. What do you mean “exercised”? Let’s step back and provide some background.

A stock option, in general, is something a taxpayer can posses that allows the purchase of a stock of a company. To get possession of the stock, the taxpayer must exercise the option, which simply means they buy the stock under the terms of the option.

For today we’re talking about an option granted (given) to the taxpayer by the employer. The option specifies when it can be exercised and price of the shares that are being exercised (bought). Summary: this is an employee benefit and usually found in larger companies as a method of compensation – and that’s key since compensation is taxable.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]

Disclaimer: The content is drawn from a variety of sources, including (but not limited to) articles, Internal Revenue Code and Regulations, Court cases, articles, and other unofficial resources.

Non-qualified stock options [NQSO] can be a complex area of tax preparation. Why are they called non-qualified? Because they are immediately subject to tax when exercised.

Hmmmmm. What do you mean “exercised”? Let’s step back and provide some background.

A stock option, in general, is something a taxpayer can posses that allows the purchase of a stock of a company. To get possession of the stock, the taxpayer must exercise the option, which simply means they buy the stock under the terms of the option.

For today we’re talking about an option granted (given) to the taxpayer by the employer. The option specifies when it can be exercised and price of the shares that are being exercised (bought). Summary: this is an employee benefit and usually found in larger companies as a method of compensation – and that’s key since compensation is taxable.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

Charitable Contributions

Charitable Contributions

Disclaimer: The content is drawn from a variety of sources, including (but not limited to) articles, Internal Revenue Code and Regulations, Court cases, articles, and other unofficial resources. 

These are usually no-brainers – deduct what you gave. Well, not necessarily. There are some rules that you need to remember:

  1. All charitable gifts must be gifts, i.e., the donor gets nothing in return. If the donor gets something in return, the deduction is limited to the amount the contribution exceeds the value of the gift. Example: Tickets to a charitable fundraiser cost $100 each. The attendee receives a nice dinner which has a value. So, the deduction is $100 less the value of the meal. Catch: The charity must provide a receipt that spells out the value of the gift – no receipt, no deduction (because the taxpayer can’t verify the value received, neither can they verify the gift amount).There are exceptions. If the donor receives something of only nominal value, it can be ignored. However, the charity must provide written documentation that nothing of value was received in return for the gift. 
  2. Bingo and raffle tickets are not a gift. Payment to play is a gambling cost even though the event activity is to raise funds for the charity. Don’t forget: When you win, that’s a taxable event!
  3. Any single donation of $250 or more requires a written receipt from the charity; a cancelled check isn’t enough. The receipt needs to be in the taxpayer’s possession prior to filing the return. No receipt, no deduction
  4. Don’t forget donations made from payroll. The W-2 usually does not show these. You will need a year end paystub for proof. Also, if each payroll deduction is less than $250, then the written receipt rule doesn’t apply. 
  5. A deduction for up to $50/month for a student living with the taxpayer if there is a written agreement between the taxpayer and the qualified organization. A month can be as little as 15 days. This is usually for foreign exchange students. 
  6. Out of pocket expenses for services provided to a charitable organization. Expenses don’t include the value of the taxpayer’s time. Typical costs include use of a car to provide the service, which can be gas & oil or 14 per mile. This mileage is not subject to the commuting rules. Expenses can include attendance at a conference where attendance is based on being a representative of the charity. Expenses include the conference fee, lodging, and meals (at 100%), airfare, etc. Caution: Miles to deliver noncash contributions to a charity are not a charitable expense because such trips are not made on behalf of the charity. These trips would be part of the cost for determining the tax liability, same as for tax preparation cost and tax software (a deduction subject to the 2% of AGI limitation, now suspended for 2018 – 2025). 
  7. Gifts to individuals are not deductible. Gifts must be to a qualified charity. GoFundMe type fundraisers don’t count since those organizations are not charities. 
  8. Qualified Charitable Distribution [QCD]: A distribution from an IRA that is an RMD made directly to a qualified charity satisfies the RMD requirement and the distribution will not be a taxable distribution. A 1099-R will usually be issued; software should provide a method of marking the distribution as a QCD. Caution: The IRA beneficiary must be 70 ½ or older on the date of the distribution to qualify for this benefit.

IRS Pub 526 is your best resource for these and other requirements and limitations.

ABC TEST

ABC TEST

Disclaimer: The content is drawn from a variety of sources, including (but not limited to) articles, Internal Revenue Code and Regulations, Court cases, articles, and other unofficial resources.

The term ABC Test stems from a court case (Dynamex) where the California Supreme Court established some new guidelines for determining whether workers employed by an employer were employees or independent contractors. The employer treated drivers as independent contractors; the court determined that, under their 3 step testing, the drivers were actually employees.

The 3 steps to be used to determine that a worker is an independent contractor: 

A – the worker is free from control and direction in the performance of services: and

B – the worker is performing work outside the usual course of the business of the hiring company; and

C – the work is customarily engaged in an independently established trade, occupation, or business

This lettering is from the court documents, thus the ABC Test label.

In summary, the court established that a worker is an employee unless that worker “passes” the ABC tests.

The A test is fundamentally the same as we have used for years and its primarily focused on who controls the activities of the worker. The court looked to another court case, Borello,1 to clarify the control aspects. This multi-factor test, also known in IRS lingo as the 20-question test, allowed a determination that satisfied a majority of the questions.

The B and C tests are the new issues and they substantially narrow the door to independent contractor status.

California followed this case with new legislation, AB-5, which codifies the ABC test, i.e., adds this testing process to the law. But, lest you decide to accept the mantra “all workers are employees,” there is some good news in the legislation.

There are exceptions that include doctors, psychologists, dentists, podiatrists, insurance agents, stock brokers, lawyers, accountants, engineers, veterinarians, direct sellers, real estate agents, hairstylists and barbers, aestheticians, commercial fishermen, marketing professionals, travel agents, graphic designers, grant writers, fine artists, enrolled agents, payment processing agents, repossession agents and human resources administrators. There are exceptions for photographers, photojournalists, freelance writers, editors or newspaper cartoonists who make 35 or fewer submissions a year, as well as for some types of business-to-business activities. Newspaper delivery workers have a year before they are included in the employee hopper.

OK, so your tax practice is outside of California. Well, don’t relax just yet. In recent years 20 states have already implemented the ABC test in one form or another. It’s to be expected that these and other states will be using the AB5 law to beef up their own implementation of the independent contractor review process.

States that use some aspects of AB5 already include Hawaii, California, Louisiana, Mississippi, Alabama, Pennsylvania, Vermont, New York, Connecticut, Idaho, Colorado, and Illinois.

The IRS will also take a keen look at AB5 and I would be surprised if they didn’t decide to implement the ABC test to their own guidance and audit processes. And politicians are already in the chase ‒ Sen. Bernie Sanders, has introduced the Workplace Democracy Plan, which takes a similar approach to AB5. He and many other Democratic presidential candidates, including Elizabeth Warren, Kamala Harris, Pete Buttigieg and Julián Castro, support AB5.

NOTE: The IRS and states assume that a worker is an employee unless proven otherwise.

There is lots of information floating around the internet. You can put yourself to sleep trying to read all of it even though there is good information to be had. Below I’ve included links to some of the materials that is probably worth your time and effort.

In summary, there is a lot of unsettled issues and there will be court cases and other negotiations before we have a truly clear picture of what this means to us as tax professionals as well as our clients, particularly the small business owner who bears most of the burden.

Resources

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

https://www.sandiegouniontribune.com/business/story/2019-09-25/abcs-of-ab5-independent-contractor-law

https://en.wikipedia.org/wiki/California_Assembly_Bill_5_(2019)

https://www.thebalancesmb.com/what-is-the-abc-test-for-independent-contractors-4586615

California Health Care Mandate

California Health Care Mandate

Disclaimer: The content is drawn from a variety of sources, including (but not limited to) articles, Internal Revenue Code and Regulations, Court cases, articles, and other unofficial resources. 

Just when you thought it was safe……. OK, you know that line. In the tax world we just got rid of the federal health insurance mandate only to get it from California. Our legislature is determined to force everyone to buy health insurance in spite of the Supreme Court’s determination that such a mandate is unconstitutional.

New law requires California residents and their dependents to obtain minimum health care coverage by January 1, 2020. If you hadn’t already noticed, that date is just around the corner.

Penalty: Up to $695 annually per individual. There are other features that are similar to the former ACA. You can find more details at the link below. That will be easier than me trying to put another 500 words in this blog to explain it!

https://www.ftb.ca.gov/about-ftb/newsroom/news-articles/health-care-mandate.html