Dieter has always enjoyed an adventure, so he has decided to leave his Carolina
ID: 2803036 • Letter: D
Question
Dieter has always enjoyed an adventure, so he has decided to leave his Carolina home and accept a position with a start- up company based in Seattle. The company is panning to develop and manufacture and market a product which will allow fo early detection f an oncoming cold before the virus enters the body. Dieter thinks that their product could end the "common cold" as we currently know it. As part of an enticement for Dieter to leave tranquil Carolina for rainy and dark Seattle, the company will be granting him 10,000 shares of Restricted Stock which is currently with $1 a share.The stock will vest at the end of year 3.
a. assuming dieter stays with the company thru at least year 3, what are the tax consequences to Dieter if the stock is worth $5 a share at the time. Dieter is in a 30% tax rate for ordinary income and a 15% rate for long term capital gains. Compute the tax consequences to Dieter in year 1 and year 3 in terms on income recognition and taxes due.
b. Now assume that dieter comes to you as soon as he learns that the grant of restricted stock is to be issued to him. He explains that another worker told him the the needs to "do an 83(b) election is. further, dieter explained to you that he believes the stock will appreciate tremendously from year 1 to year 3- what would you recommend: make an election, or tell his friend that his friend is getting bad tax advice? explain your answer.
Explanation / Answer
a) In the year 1 as shares are allotted, his income would be 10000 shares @$1 per share = $10000 and the same is taxed @30% tax rate as ordinary income
Tax amount payable by dieter in year 1 = $3000
in the year 3, Dieter need not pay any tax, because he has not sold any shares. There was only increase in the value.
b) In the above scenario if 83(b) election is made by dieter within 30 days from the date of allotment of shares by company
Year 1 - Tax amount payable by dieter in year 1=$3000 (10000 shares @$1 per share = $10000*30%)
Year3- Need to pay tax @longterm capital gain tax rate @15% on the value of shares sold minus(-) $10000
If Sec.83(b) election is not made
Year1 - Need not pay any tax
Year3 - Need to pay tax @ ordinary tax rate of 30% on the share value at the time of vesting. In the above example if share value is $5 at the time of vesting, he needs to pay $15000 as tax (10000shares@$5 * 30%).
if the shares are sold with in 12 months from the date of vesting, then ordinary tax rate @30% is payable on the sale value of shares(minus)-share value at the time of vesting.
if the shares are sold after 12 months from the date of vesting, then long term capital gain tax rate @15% is payable on the sale value of shares(minus)-share value at the time of vesting.
From the above options it is advisable to file section 83(b) election if we have belief that company shares will increase.
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