Here’s a quick overview of key tax and accounting changes affecting employee plans taking place this year, and on the horizon.
Increased IRS penalties for incorrect or missing “information returns”
“Information return” is the term for the tax documents businesses must use to notify the IRS about reportable transactions or non-wage dealings within a calendar year, such as Forms 1042-S (dividends to non-US people), 1099-DIV (dividends), 1099-B (sales proceeds), 1099-INT (interest), 3921 (ISO exercise) and 3922 (ESPP share transfers). As part of the Trade Preferences Extension Act of 2015, the penalties charged for incorrect or missing information returns have been increased from $100 to $250 per instance, with a maximum of $3 million, with separate penalties for failing to file with the IRS and failing to mail to the shareholder/participant. Computershare is committed to making sure your information returns are filed accurately and on time.
Proposed change to Section 83(b) election filing requirements
Last year the IRS ruled that a Section 83(b) election was valid even if the taxpayer failed to include a copy of the election with his/her tax return for the year (see this October Insights article for details). The IRS is now taking the next step, proposing an amendment that would eliminate the requirement to include the form altogether. The proposed regulations would apply to all stock transferred (grants of restricted stock and exercises of unvested stock options) on or after January 1, 2016, but taxpayers can rely on them for stock transferred in 2015. The text of the proposal can be found in the Federal Register.
Stock plan accounting changes on the horizon
FASB is in the process of drafting changes to its stock plan accounting standards. When the changes are adopted, they will be effective for fiscal years after Dec. 15, 2016 (for calendar-year companies, that means the change would affect financial statements starting January 1, 2017). Here’s an overview of the expected changes:
- Tax accounting: All tax benefits to a company from employees’ equity compensation earnings will be recorded under tax expense. Previously, these would be first recorded under “additional paid-in capital.
- Estimated forfeitures: Companies currently are required to estimate forfeitures of awards, which would reduce compensation expense between grant and vesting. With the new standards, companies will have a choice to reduce expense as forfeitures occur, or continue to estimate forfeitures
- Share withholding: Companies will be allowed to withhold shares to cover taxes based on the maximum statutory payroll rates for the employee. Previously, FASB allowed share withholding only to cover the minimum statutory rates.
More information is available on the FASB website.