Strategic tax decisions are crucial when it comes to maximizing the value of your stock options...timing is essential. However, your most important decision may be selecting expert advisors. Your advisors need to know the details of your stock plan, the tax rules, and your personal tax situation. And they need software and experience to analyze the various scenarios. If we do the analysis, you may save tens or hundreds of thousands of dollars in annual taxes. With careful planning, you may defer taxation, and get capital gains treatment when you sell. However, without any planning, you may overlook an important opportunity, and be forced to pay ordinary income tax now, leaving you with an illiquid stock certificate.

The professionals at Rowbotham & Company have many years of experience counseling CEOs and executives with public companies and new ventures heading to an IPO. If you have a major  planning decisions, we will swing into action. If you need a board-room presentation to educate your senior team, we will provide a professional and detailed multimedia presentation which cuts through the tax code to help the decision maker. If you're a new venture, we will help with specific recommendations concerning the type of plan, and the consequences to the company and the employees.

Key Issues

Your advisors need to be knowledgeable about the following:

• Incentive stock options
• Non-qualified stock options
• Stock purchase plans
• Stock award plans
• Vesting and forfeiture rights
• Assignment of benefits
• Restricted stock provisions
• Cashless exercise of options
• SEC affiliate rules under Rule 16(b)
• Lockup rules under Rule 144
• Deferred compensation and "Rabbi Trusts"
• Valuation and discounting opportunities

The Importance of Timing

Holders of stock options have two choices at this time:

1. Do Something
2. Do Nothing

The Do Something strategy includes exercising your incentive stock options and possibly incurring some alternative minimum tax and starting the holding period in order to get long-term capital gain treatment when the stock is sold. It may include making an 83(b) election if you are within the required time period allowed. If you're a private company, it may include setting up a stock award or option plan so key people can take advantage of minimizing taxes before the value of the company explodes. The Do Nothing strategy may, at times, be the smart "action plan" if exercising will attract lower present taxes.  

Corporate 

On the corporate side, valuable deductions can be obtained. However, withholding rules frequently come into play and must be observed in order to avoid penalties. The big issue for the company should always be: Do we have the right plan?

Alternative Minimum Tax

If you're considering taking action by exercising your incentive stock options, you will probably trigger alternative minimum tax. This tax becomes relevant if the spread between the exercise price and value, times the number of share you exercise (the "preference" amount), is significant. If you're subject to AMT, you lose the benefit of your state income tax deductions and miscellaneous deductions. Determining whether AMT applies is a function of your income and deductions. You'll need to crunch the numbers.

Additionally, you'll need to consider strategies regarding how to address your reverse AMT preferences in subsequent years.

Section 83(b) Election

Section 83(b) Election of the Internal Revenue Code addresses the transfer of property in exchange for the performance of services. A timely 83(b) election can make or break your future tax liability. Many stock awards are given to key employees with vesting provisions. The election allows the holder to include the value of the stock in income currently. If your company is privately held , the amount of income to be recognized is usually minimal. If you hold the stock long enough, you'll get capital gains treatment. If you don't make this election, you may have significant tax liabilities as the stock becomes more valuable over the vesting period. However, if you pay some tax now, and the stock subsequently declines in value, you may have worsened your situation. The analysis related to making the election requires a combination of skills: assessing the tax costs and assessing the risks concerning the stock's future value.

Representative engagements