Chapter 27 – ESPP Tax example question

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  • #5003
    mikegraf
    Participant

    in the 2014 edition the ESPP section has an example with holding period satisfied and stock lower at end of the offering period. (Page 233) .

    Another: Change the facts. At the end of the offering period the stock is down to $8 per share. The plan says you pay 85% of $8, or $6.80 a share. The stock’s price recovers and you end up selling at $14. You sill report compensation income of $1.50 per share, because the bargain element at the time of exercise doesn’t matter. You would add $1.50 to your purchase price of $6.80 to come up with a basis of $8.30. Your capital gain on the sale would be $5.70.

    (in the previous example the price at the beginning of the offering period was $10).

    My question. How do we get $1.50 for compensation income?

    #5011
    Kaye Thomas
    Moderator

    This is a continuation of an example in which the stock value at the time of the grant is $10, and the plan allows a 15% discount on the purchase price. The law provides a peculiar rule here. It says that if you satisfy the holding period, your compensation income is determined based on the amount of discount you would have received as of the grant date, which in this case is $1.50. You’re required to report that much compensation income even though the actual discount received is only $1.20 because we look back to the discount you would have received as of the grant date.

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