SPEED ROUND: Stock Compensation: NSOs + ISOs

Dark Horse CPA

Learn the ins and outs of Incentive Stock Options (ISOs) and Nonqualified Stock Options (NSOs) and how to be tax efficient with these options.

Podcast Transcript

welcome back. Everyone to taxes made simple. My name is Justin Kearn and I’m joined with  my cohost chase Berkey, the CEO of dark horse CPAs. We’ve got a lot going on right now,  and we’re really excited to share this episode with you because there is. One, a stimulus  package that is coming out, those passed by Congress. 

We want to dive deep into the details and how they impact you as the individual  or as a business owner, as well as all the tax changes that are coming through with the  transition of leadership in our country. So we’re going to dive right in chase. Welcome. And  I’m glad we’re doing this via video, cause I can see your beautiful background. 

And you can see my, my office. It’s, it’s very nice. I’m in the middle of a blizzard right now. So if you hear that, my apologies. It’s all right. So a couple things, one I benefit  from free tax advice. From you because obviously I’m part of this podcast, which I’m very  pleased about, but a lot of the individuals out there are probably a little lost trying to figure  

out what’s going on with the stimulus bill, how it impacts them as an individual, as well as all  the tax changes coming up with the Biden administration. 

So let’s just dive in. Tell me about the stimulus bill first and what people need to  know. Well, I’ll state the obvious here. Uh, there are a lot of people out there who are  feeling a little underwhelmed by stimulus jacks. And some of the other measures, like the  additional $300 a week of unemployment insurance, a lot of the relief in this bill is actually  going to be, uh, going to businesses and not all of it is obvious in a direct way, but rather it’s  a bit more indirect. 

For a longer discussion on what’s in the bill. I’d refer our listeners to our  December 22nd episode of this week, this morning, which you can find on the blog section  of our website, which is dark horse dot CPA. And there’s no.com. They’re just dark horse dot  CPA, or you can find it directly on YouTube by searching for darker CPAs, where you can  subscribe to our channel for all things, tax and relief for businesses and individuals. 

I know it’s shameless, but I’d be an idiot not to plug these things. And they really  do provide a ton of value for people. We just like to cut right through the noise and let  people know what they need to know without overwhelming them. So, anyway, to answer  the original question, you’ve got $600 stimulus checks per person, which also includes an  unlimited number of dependent children under the age of 17. 

So if you’ve got a big family, you’re going to get a big check. There’s also the $300,  additional unemployment insurance that will last 11 weeks starting December 27th through  March 14th, but on the business side of things, you’ve got another round of triple P and E  IDL round. Two of triple P’s is for businesses with less than 300 employees that have  experienced a decline in revenues of 25% in any calendar quarter in 2020 as compared to  the same quarter in 2019. 

The maximum loan amount is going to be 2 million this time, but certain  businesses will qualify for a bigger loan than last time due to a provision that allows hotels 

and restaurants to calculate their loan as 3.5 times monthly payroll, instead of the 2.5 X that  everyone else gets the expenses paid for it by triple P one and triple P two loans are actually  now going to be deductible despite the IRS’s previous objections and those Eids emergency  grants, many businesses received. 

Well, not reduce their triple P loan forgiveness. Triple P loans of less than 150 K  can be forgiven by the owners simply by signing a one-page form, attesting that they  complied with the requirements of the program. And this will be true for triple P one and  triple B two, and there’s going to be a new round of Eid Al grants and loans for live venue  operators, independent movie theaters, cultural institutions, such as museums and other  hard hit businesses in low income communities. 

Wow. That’s a, that’s a mouthful. There’s a lot going on there. And I, and I did  watch the, um, the video you were talking about that you referenced, um, you mentioned  that there were some other tax credits and deductions, um, that were involved in the bill. Do  you want to dive into those two? Yeah, absolutely. 

So maybe most notably was the provision that will allow for businesses to take  both a triple P loan and the employee retention, tax credit, uh, further, they extended that  through July of 2021. And increase the credit from a maximum of $5,000 per employee to  14,000 a bit more under the radar is the extension of the charitable donation deduction for  those who don’t itemize. 

And this is extended to 2021, and that’s up to $600 for married taxpayers and  $300 for all others. Another item is the FSA balances can roll over from 2020 to 2022  without the account, a hundred having to forfeit any of the funds that remain in the account  at the end of the year, as they normally would, uh, in anyone who deferred payroll taxes  under Trump’s executive order has until the end of 2021 to repay those taxes as opposed to  April. 

Another item is that paid sick and family leave. Payroll tax credits that were made  available under the FCRA are extended through March of 2021. And last just about every tax  extender was indeed extended. These are mostly taxpayer friendly provisions, which is why  they require Congress to reauthorize them periodically. 

Got it. Well, that all sounds pretty positive. So with these changes, I mean, look,  we’re we’re at the end of the year here it’s 20, 20, December, 2020. Right now we’re coming  onto the new year. People are running out of time, correct? To 100% correct. Okay. Right. So  if, if I believe taxes are going up as an individual or for that matter, I think that there’s a  decent chance that taxes are going to be going up. 

What should I do? Great question. Hopefully I can meet a great question with a  great answer on this one. I would say that for businesses who are not in dire need of cash to  stay alive, And or taxpayers that have access to cheap capital, you should generally be  pushing forward income into 2020 in deferring deductions to 2021 while placing bookmarks. 

So to speak that will allow you the flexibility to reverse some or all of that  increased taxable income. When you file your 2020 return in 2021. Basically the idea is that 

we’ll know a lot more by the time you file your tax returns, which could be as late as October  15th of 2021 in terms of what 2021 and beyond is going to look like from a tax standpoint. 

So if you push forward your taxable income into 2020. Uh, but bought equipment,  which I would recommend doing on credit. Once again, if you can get attractive terms, you  could elect to 100% bonus depreciate the property. If you determine that the tax code isn’t  going to change much in 2021 or potentially the years after. 

In that scenario, you might also max out your employer contributions to your  retirement account for tax year 2020. Cause you can do that in 2021. And this essentially  allows you to unwind some or all, all the taxable income that you created for yourself by  pushing forward income and deferring deductions. 

And the reason you did that in the first place to be clear was that if taxes go up  noticeably in 2021 and beyond you’ve at least recognized this income at lower 2020 tax  rates. Okay. I like that. So you reckon you can recognize income in 2020, you can defer  expenses to 2021 and all sounds good, but you mentioned something and this probably is  not possible for individuals or companies that are cash poor right now that need money  today. 

So what should they be doing? Right. I mean, you’ve always got to take the larger  picture into account with tax planning, because quite honestly, it’s easy to be penny-wise  dollar foolish, trying to save a few bucks in your taxes at the expense of your own overall  financial wellbeing, you know, so you gotta really consider everything and not bleed all the  cash out of your business. 

Just trying to save a couple bucks in taxes. So if you need cash now, then you’ve  got to really do the opposite of this strategy. You want to push forward expenses into 2020.  In defer income until 2021. And if you can generate a net operating loss as a result, then you  can carry that back to previous tax years, to offset that income and claim a refund, which is  honestly just going to be more cash in the bank for you. 

You’ll also want to take advantage of all of the tax credits and deductions that  were part of the latest stimulus bill, as I was mentioning before, as well as any loan  programs you may qualify for. And that includes on the state and local level. Gotcha. Okay.  Well, what exactly do these strategies you just mentioned look like, and that’s a great  question. 

I’ll answer that right after the short message. Hey everybody, this is chase Berkey,  CEO of dark horse CPAs. If you’re an entrepreneur and investor, a co-founder or someone  who just has a complicated tax situation, you should absolutely consider reaching out to a  dark horse CPA. Unlike most firms where you’d end up working with lower-level staff  members. 

If you engage with a dark horse CPA, they will be your CPA. The one you call,  email and meet with for all of your tax needs, you can choose your very own dark word CPA  on our website, where you’ll be able to see their areas of expertise and a bio about what  makes them, who they are. Just go to dark horse dot CPA slash team.

Once again, that’s dark horse dot CPA slash team to find a CPA that will help you  understand your taxes and how to minimize it. All right. Welcome back, everyone. Back to  the subject at hand chase, what strategies can an individual execute, who thinks tax rates  are going to increase after 2020 and by an individual and meaning, you know, personal tax  return, not a business tax return. 

Right. So this person, once again, is going to want to increase their taxable  income in 2020 so that it will be lower in 2021. And how exactly might they do that? They  might request that a bonus that would otherwise be paid in Q1 of 2021, the accelerated to  December, they might exercise non-qualified stock options or ESPs in 2020, that would  trigger ordinary income upon exercise. 

Both of these could not only decrease their income tax, but if they make over 400  K it could also save them the 6.2% social security tax that could be levied on that income  under Biden’s tax plan, they might also sell stock that has unrealized gains so that the  income is recognized in 2020. After all long-term capital gains could be taxed as high as  39.6% under Biden’s tax plan. 

And what about for those people who don’t think taxes are going up? Um, for  whatever reason, what should they be doing to reduce taxes at least this year? Well, there’s  the low hanging fruit, like maxing out retirement contributions, HSHS, FSAs, or any other  qualified tax deferred account. What they may not be aware of, however, is that they can  take a charitable donation deduction for up to 100% of their adjusted gross income, which  would essentially wipe out all of their taxable income. 

And as a result, their income tax. Or if they don’t itemize, they could donate up to  $600 if married $300 of single and that’s in terms of what they could deduct, they might sell  stock that has unrealized losses. If they have capital gains to offset, obviously making sure  not to buy that stock back within 30 days to avoid disallowance of the loss via the wash sale  rules. 

Or they could roll any capital gains that they can’t offset with losses into a  qualified opportunity fund or QOF, which would allow them to defer the gain until 20, 26  and eventually only pay tax on 85% of the original game. If they hold onto that QF  investment long enough. Also any games on the QOF investment itself would be tax-free if  they hold onto it for at least 10 years. 

So what about getting cash now? How can the individual get cash now? That’s not  a deduction, not a tax credit, right? So they could take a COVID related distribution from  their 401k or IRA of up to a hundred thousand dollars without incurring the normal 10%  penalty for early withdrawal. Additionally, they would only have to pay one third of the  income taxes from the distribution each year for three years. 

And they could re contribute the entire amount back and recoup the taxes paid if  they do. So before the end of 2020. That’s pretty interesting. I know that I may, I may take  up that offer personally. Um, okay. So what about some strategies that actually work for 

both types of taxpayers, to people that think taxes growing up and people that don’t think  taxes are going up. 

What can both parties be doing this year? Um, or diff you know, from a, from an  income standpoint and defer taxes in later years. Right. So if you’re thinking about buying  your first home, you might want to wait until the Biden tax plan rolls out because there’s a  tax credit for first time home buyers, that could be up to $15,000. 

And if you’re a retirement age and would normally have to take a required  minimum distribution, AKA RMD, you could just not take those or send them back as you’re  not required to take them in 2020. Also make sure you avoid any penalties and interests that  could result from underpaying, your taxes by withholding extra income taxes on your final  paycheck of 2020. 

Okay. Well, that’s something I can at least can, can start doing. Um, let’s, let’s dive  into this exercise one more time only, just time for business owners or for business  taxpayers. Um, what can businesses do to push forward income into 2020 or defer expenses  into 2021? Well, they could do exactly that. If they are a cash basis, taxpayer, they could  send out all invoices now and consider extending discounts to customers for payment. 

Prior to your end with expenses, just let the bills pile up and pay them. In 2021 for  S corporations that were formulated C corporations, they may want to make an election to  distribute their accumulated earnings of profits in 2020. So as to pay tax on the dividend  income at the current tax rates, which are likely to be much lower than those under Biden’s  tax plan. 

There are a few other things that they can do that are a bit too nuance to this  conversation that we’ve listed on our blog. Also, these businesses would be wise to keep the  placeholders that I mentioned earlier by purchasing equipment on credit so that they can  retain cash and decide with the benefit of hindsight, how to depreciate the asset. 

And now, because cash is King, what can businesses between that, that need that  cash today? You know, or what should they be doing? Right. So they should actually be  doing the opposite. So they should be deferring income to 2021 and accelerating expenses  to 2020. So wait to send out invoices until 2021 and pay invoices that you would have  otherwise made in January or early February of 21 before the end of 2020, any net operating  losses created by doing this can be taken back to previous years to offset income and  generate a tax refund, which as I mentioned before, is money in the bank. 

They should consider paying employee education, expenses, and disaster relief  expenses through the company in lieu of distributions for owners, since it’s not taxable to  the recipient and is deductible by the company. There’s more info about that on our blog as  well. They should also consider buying equipment on credit to be able to utilize the 100%  bonus depreciation deduction without having to part with the cash to do so. 

All right, I’m falling, I’m falling. And now to sum it up, the strategies that would  work for, for both types of businesses, right? So businesses do have many other 

considerations. They need to be cognizant of really on both sides of the coin that we’ve been  talking about. And this would include the 20% qualified business income deduction. 

They’re going to want to maximize this in any year, but maybe especially. So in  2026, it could go away for taxpayers in 2021 and beyond under the Biden tax plan. For  taxpayers over certain income thresholds who have qualified businesses, AKA one that is not  a specified service business. They’re going to want to make sure that the W2 wages paid for  by the company, allow them to maximize the 20% deduction. 

And it’s a bit of a balancing act to get that right. And something they should  consult with their CPA on a business might also want to be extra charitable. Given the  circumstances that society at large is dealing with. In 2020, they can deduct charitable  donations up to 25% of their income, as opposed to the 10% that existed the cares act. 

But this is for 2020, only by the way, they’re going to want to make sure that they  get all of the tax credits that they’re eligible for under the new stimulus bill. And they may  want to consider the possibilities of onshoring some of the business operations as the Biden  tax plan calls for penalties, for offshoring in tax credits for entrepreneur. 

All right. Well, look, I’m, I’m feeling a little bit better about the information that  you shared. I’m definitely gonna need to re listen to the podcast though, because it’s a lot of,  a lot of information to digest. I’m sure everybody out there is also thinking the same thing.  So definitely going to listen to it one more time. 

At least indeed there is, and I’ve actually got some Pepto for you. If you need  some help digesting. Yeah, thank you. I actually use a coffee for that type of digestion, but  thank you for the offer. I appreciate it. And that is it for this episode. Happy holidays to  everyone. Even if the phrase sounds like a little bit of an oxymoron this year, we hope it’s  better than expected for each of you. 

Um, thank you for tuning in to TMS, or if you’re not into the whole abbreviation  thing, it’s taxes made simple because there’s TMI and then there’s TMS. Happy holidays,  chase. Thank you. 

And now for the disclaimer, the content in the proceeding podcast should not in  any way be construed to be tax advice. All tax laws are nuanced in. Those are applied to  each unique situation differently. Don’t be a dummy IRS CPA, preferably a dark horse CPA.

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