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CGCPA
CGCPA, CPA
Category: Tax
Satisfied Customers: 3738
Experience:  over 40 years experience in tax matters
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Recording of Company Shares

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My company has 100,000 shares authorized of which 10,000 are issued at $1 value and recorded as common stock $10,000. We recently gave 2 employees a total of 600 of the remaining 90,000 authorized. How do I record this transaction on our financials? Additionally, we just had a valuation of the company and the stock was valued at $143 a share. Do I record the 600 shares at FMV and the offset is bonus expense? Do I need to restate the rest of the 10,000 stock at FMV at the same time. Or, is it better to just request the employees pay the company $600 ($1 a share)? Last, for IRS taxes do the employees pay Federal and FICA, and do they do so at FMV or at $1 par?
Submitted: 2 years ago.
Category: Tax
Expert:  CGCPA replied 2 years ago.

Charles Greiner :

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

Charles Greiner :

The key point is that stock must be issued for at least the par value per share stated in the corporate formation documents. That will be one controlling factor. The other is that previously issued stock does not get revalued on the books. It would, if done, create phantom income/loss situations. That said, if the stock has a $1 per share par value the 600 shares must be valued at $600. This can either be paid to the corporation by the employees or it will need to be recorded as income to them. The employees will be taxed on their W-2 forms for Social Security and Medicare taxes. No other taxes need be involved.

Expert:  CGCPA replied 2 years ago.
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Customer: replied 2 years ago.
1) If we record the stock to the employees at $1 par, do the employees pay Federal, Social Security and Medicare taxes at the $1 par value, or at the FMV?
2) Can you provide the authoriative source/reference that states even though we have a FMV on the stocks, we should record the transactions at the orginal corporate formation amount of $1 par?

Expert:  CGCPA replied 2 years ago.

Since you cannot coerce the employees into acquiring the stock you have a stock option situation. Here is a piece from the IRS about that with links to other helpful material. The price of the stock is always booked at par value. Any amount above that is recorded as additional paid in capital.

Topic 427 - Stock Options

If you receive an option to buy stock, you may have income when you receive
the option, when you exercise the option, or when you dispose of the option or
stock received when you exercise the option. There are two types of stock
options: statutory stock options and nonstatutory stock options. Generally,
options granted under an employee stock purchase plan or an incentive stock
option (ISO) plan are considered statutory stock options. Nonstatutory stock
options are not granted under an employee stock purchase plan or an ISO plan.
Refer to Publication 525, Taxable and
Nontaxable Income
, for assistance in determining whether you have been
granted a statutory or nonstatutory stock option.

If you are granted a statutory stock option you generally do not include any
amount in your gross income when you are granted or exercise an option. However,
you may be subject to Alternative Minimum Tax in the year you exercise an ISO.
For more information, refer to the Form 6251
Instructions
. You have taxable income or deductible loss when you sell the
stock you received by exercising the option. You generally treat this amount as
a capital gain or loss. However, if you do not meet special holding period
requirements, you will have to treat income from the sale as ordinary income.
Refer to Publication 525 for
specific details on the type of stock option rules, for when income is reported
and how income is reported for income tax purposes.

If you are granted a nonstatutory stock option, the amount of income to
include and the time to include it depends on whether the fair market value of
the option can be readily determined. If an option is actively traded on an
established market, the fair market value of the option can be readily
determined. Refer to Publication 525 for other circumstances under which the
fair market value of an option can be readily determined and the rules for when
income is reported for an option with a readily determinable fair market value.
Most nonstatutory options do not have a readily determinable fair market value.
For nonstatutory options without a readily determinable fair market value, there
is no taxable event when the option is granted but the fair market value of the
stock received on exercise, less the amount paid, is included in income when the
option is exercised. You have taxable income or deductible loss when you sell
the stock you received by exercising the option. You generally treat this amount
as a capital gain or loss. For specific information and reporting requirements,
refer to Publication 525, Taxable and
Nontaxable Income
.

Customer: replied 2 years ago.

Let me see if I understand the responses as they apply to the company and the employee.

1. The company records a sale of stock of $600.00 - par value for 600 shares

2. The employees now have the stock, and will receive distributions of shareholder withdrawals on the active stock as long as they are with the company and don't leave and sell the stock.

3. The employees report income of the FMV of the stock and pay taxes on that amount. They also pay the $600.00 to the company for the stock, so that amount should be reduced from the FMV.

4. I still don't understand how any of this relates to options.

 

Expert:  CGCPA replied 2 years ago.

1.Correct

2.Correct

3.Correct

4.The employees have the option to acquire the stock. If they do the difference between the par value and fair market value is income to them immediately. They report this on their tax returns as income in the year they exercise the option. At a later date, when they dispose of the stock this (par value + excess of value over par) serves as basis in determining their gain/loss.

CGCPA, CPA
Category: Tax
Satisfied Customers: 3738
Experience: over 40 years experience in tax matters
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