### Author Topic: Understanding ESPP  (Read 3654 times)

#### frugalnacho

• Magnum Stache
• Posts: 4781
• Age: 38
• Location: Metro Detroit
##### Understanding ESPP
« on: March 22, 2015, 02:39:28 PM »
I don't know exactly how this is going to show up.  It's part of my dad's ESPP account, but I am having a hard time understanding and making sense of all of it.  The company is waste management.

The first purchase was for 26.1080 shares at \$26.0695 for a total price of \$680.62.  It shows ordinary income as \$120.11 for that transaction so I am assuming he paid 680.62-120.11=\$560.51 out of his paycheck, and the company paid \$120.11 (which he doesn't claim as income until the year he sells the stock).   Is that correct?  It lists \$743.57 as the unrealized gains for that lot.

\$560.51 + \$120.11 + \$743.57 = \$1424.19, which is the current market value of that lot.

The next thing that is confusing me is the dividends.  On August 31, 2006 they issued a dividend of \$0.22.  By my calculations he should have earned 26.1080 shares x \$0.22/share = \$5.74.   On September 22, 2006 there was a dividend reinvestment.  The price on 9-22-06 was \$35.35, so I calculate he should have reinvested the \$5.74 into 0.1625 shares. I'm unsure why it lists 0.1118 and 0.1120 for the acquired and available for sale shares (or how those values are different.  How did he acquire 0.1118 shares in 2006, but have 0.1120 available for sale? is this rounding error?).

When does he report that dividend on his taxes?  Does it count as income for 2006? Or does it get to reinvest in the ESPP and not have to be reported until he sells?

Acquired Date   Acquired Price   Acquired Via   Quantity Acquired   Available for Sale   Ordinary Income   Unrealized Total Gain (Loss)   Current Market Value
30-Jun-2006   \$26.0695   Share Deposit   26.1080   26.1080   \$120.11   \$743.57   \$1,424.19
22-Sep-2006   \$35.4312   Dividend Reinvested   0.1118   0.1120   \$0.00   \$1.96   \$6.11
22-Dec-2006   \$35.7910   Dividend Reinvested   0.1112   0.1110   \$0.00   \$1.90   \$6.06

#### frugalnacho

• Magnum Stache
• Posts: 4781
• Age: 38
• Location: Metro Detroit
##### Re: Understanding ESPP
« Reply #1 on: March 23, 2015, 10:49:02 AM »
Anyone?

#### frugalnacho

• Magnum Stache
• Posts: 4781
• Age: 38
• Location: Metro Detroit
##### Re: Understanding ESPP
« Reply #2 on: March 25, 2015, 09:21:00 AM »
bump again.  No one can chime in and tell me if I am figuring the purchase correctly?  And no one can explain the discrepancy with the dividend reinvestment?

#### MDM

• Senior Mustachian
• Posts: 10630
##### Re: Understanding ESPP
« Reply #3 on: March 25, 2015, 12:41:50 PM »
The first purchase was for 26.1080 shares at \$26.0695 for a total price of \$680.62.  It shows ordinary income as \$120.11 for that transaction so I am assuming he paid 680.62-120.11=\$560.51 out of his paycheck, and the company paid \$120.11 (which he doesn't claim as income until the year he sells the stock).   Is that correct?  It lists \$743.57 as the unrealized gains for that lot.

\$560.51 + \$120.11 + \$743.57 = \$1424.19, which is the current market value of that lot.
That seems to add up so you are probably analyzing it correctly.

Quote
The next thing that is confusing me is the dividends.  On August 31, 2006 they issued a dividend of \$0.22.  By my calculations he should have earned 26.1080 shares x \$0.22/share = \$5.74.   On September 22, 2006 there was a dividend reinvestment.  The price on 9-22-06 was \$35.35, so I calculate he should have reinvested the \$5.74 into 0.1625 shares. I'm unsure why it lists 0.1118 and 0.1120 for the acquired and available for sale shares (or how those values are different.  How did he acquire 0.1118 shares in 2006, but have 0.1120 available for sale? is this rounding error?).
Now we're into guesswork.  I'm guessing some things: 1) There was a commission of some amount on the reinvestment, 2) your guess on rounding is correct.

Quote
When does he report that dividend on his taxes?  Does it count as income for 2006? Or does it get to reinvest in the ESPP and not have to be reported until he sells?
Acquired Date   Acquired Price   Acquired Via   Quantity Acquired   Available for Sale   Ordinary Income   Unrealized Total Gain (Loss)   Current Market Value
30-Jun-2006   \$26.0695   Share Deposit                 26.1080             26.1080                   \$120.11                    \$743.57                                   \$1,424.19
22-Sep-2006   \$35.4312   Dividend Reinvested   0.1118             0.1120                       \$0.00                        \$1.96                                          \$6.11
22-Dec-2006   \$35.7910   Dividend Reinvested   0.1112             0.1110                       \$0.00                        \$1.90                                          \$6.06
Seems that should have been reported in 2006.  He should have received a 1099-DIV if and only if the total dividends paid for the year were >\$10.

For related discussion, see http://forum.mrmoneymustache.com/investor-alley/employer-stock-options/ - and of course this thread but you know that one. ;)

#### frugalnacho

• Magnum Stache
• Posts: 4781
• Age: 38
• Location: Metro Detroit
##### Re: Understanding ESPP
« Reply #4 on: March 25, 2015, 12:56:46 PM »
Quote
The next thing that is confusing me is the dividends.  On August 31, 2006 they issued a dividend of \$0.22.  By my calculations he should have earned 26.1080 shares x \$0.22/share = \$5.74.   On September 22, 2006 there was a dividend reinvestment.  The price on 9-22-06 was \$35.35, so I calculate he should have reinvested the \$5.74 into 0.1625 shares. I'm unsure why it lists 0.1118 and 0.1120 for the acquired and available for sale shares (or how those values are different.  How did he acquire 0.1118 shares in 2006, but have 0.1120 available for sale? is this rounding error?).
Now we're into guesswork.  I'm guessing some things: 1) There was a commission of some amount on the reinvestment, 2) your guess on rounding is correct.

So it looks like the initial purchase is a fantastic deal, but it seems like the dividend reinvestment is a terrible investment as he is purchasing at market price and seems to be purchasing less than I am calculating based on market prices at the time (assuming some kind of commission or transaction fee which makes sense).  I will have to check with him whether he has been claiming the dividends on his taxes for the last 9 years.  He might have hit the \$10 limit the first year, but he for sure would have hit it every year since.  He would be best off having them cut him a check for dividends, and just continuing along maxing his espp contribution and then selling it.

#### seattlecyclone

• Walrus Stache
• Posts: 5948
• Age: 36
• Location: Seattle, WA
##### Re: Understanding ESPP
« Reply #5 on: March 25, 2015, 01:24:40 PM »
The first purchase was for 26.1080 shares at \$26.0695 for a total price of \$680.62.  It shows ordinary income as \$120.11 for that transaction so I am assuming he paid 680.62-120.11=\$560.51 out of his paycheck, and the company paid \$120.11 (which he doesn't claim as income until the year he sells the stock).   Is that correct?  It lists \$743.57 as the unrealized gains for that lot.

\$560.51 + \$120.11 + \$743.57 = \$1424.19, which is the current market value of that lot.

The way it's supposed to work is that any discount on the fair market value on the date the price is established counts as ordinary income when you sell. So if the shares were worth \$30 on the date the price was set and they give you a 15% discount, you pay \$25.50, and the \$4.50 discount counts as ordinary income. The sum of the amount you paid plus the ordinary income then counts as your basis for determining capital gains. So if you then sell for \$40, you have \$10 of capital gains and \$4.50 of ordinary income, all realized in the year of sale.

Unfortunately IRS regulations require brokerages to report the purchase price as the basis for these securities even if they have enough information from the employer to be aware of what the real basis is. For shares acquired in 2006 this doesn't matter because brokerages don't have to report basis for shares acquired then, but you should be aware of it when reporting sales of newer shares. You will have to report a corrected basis amount on Form 8949 for these shares. See this thread for more detail about this.

How much did your dad actually pay for the shares? Was it the full \$680.62 (as implied by the "purchase price" column) or was it only \$560.51? In your situation it's possible that the \$743.57 is the gain calculated according to the IRS regulation mentioned above, which would actually be double-counting the ordinary income.

So either it's \$680.62 purchase price + \$120.11 ordinary income + \$623.46 capital gain = \$1,424.19 or the way you calculated it before. You'll have to look deeper into your parents' records to be sure.

Quote
The next thing that is confusing me is the dividends.  On August 31, 2006 they issued a dividend of \$0.22.  By my calculations he should have earned 26.1080 shares x \$0.22/share = \$5.74.   On September 22, 2006 there was a dividend reinvestment.  The price on 9-22-06 was \$35.35, so I calculate he should have reinvested the \$5.74 into 0.1625 shares. I'm unsure why it lists 0.1118 and 0.1120 for the acquired and available for sale shares (or how those values are different.  How did he acquire 0.1118 shares in 2006, but have 0.1120 available for sale? is this rounding error?).

When does he report that dividend on his taxes?  Does it count as income for 2006? Or does it get to reinvest in the ESPP and not have to be reported until he sells?

You owe taxes on dividends in the year the dividend is paid, 2006 in this case. Those shares you bought with the dividend money then count as a new tax lot to keep track of, with a basis equal to the dividend amount. I can't speak to how the share amounts were calculated, you'll have to talk to the brokerage firm and look over past statements to get that answer.

#### lurker

• 5 O'Clock Shadow
• Posts: 13
##### Re: Understanding ESPP
« Reply #6 on: March 25, 2015, 02:01:42 PM »
On your 1st question, it would appear the total unrealized gain of 743.57 should be split between the ordinary (120.11) and capital (623.46) components.  To your point, that won't need to be reported (and those amounts will change) when the stock is actually sold.  I come to this conclusion because the 26.0695 per share is lower than the actual stock price (35-36) around 6/30/2006.  Because ESPP plans can have different rules for determining the grant price (e.g. lower of beginning or ending of period - monthly, quarterly, semi-annual, annual??), it's impossible to say with certainty, but it would appear they based the ordinary income calculation on a FMV price of 30.67 ((120.11 / 26.108) + 26.0695).  \$26.07/\$30.67 corresponds to a 15% discount, which is common (maximum allowable for favorable tax treatment).   \$30.67 was the closing price on 1/3/2006, which would make sense if that is the date of grant and they employ a 'lower of' method.

For the dividends, he should have received a 1099-DIV and paid taxes in the year received (2006).  When he sells those shares, he would have basis in them equal to what was previously recognized (presumably 4.15 (6.11 - 1.96) and 4.16 (6.06 - 1.90) for the two shown below.

Your dividend calculation makes sense to me, and I too have no idea why you are only showing .112 shares instead of .1625.  Could it be he previously disposed of part of these partial shares?

#### frugalnacho

• Magnum Stache
• Posts: 4781
• Age: 38
• Location: Metro Detroit
##### Re: Understanding ESPP
« Reply #7 on: March 25, 2015, 02:37:25 PM »
On your 1st question, it would appear the total unrealized gain of 743.57 should be split between the ordinary (120.11) and capital (623.46) components.  To your point, that won't need to be reported (and those amounts will change) when the stock is actually sold.  I come to this conclusion because the 26.0695 per share is lower than the actual stock price (35-36) around 6/30/2006.  Because ESPP plans can have different rules for determining the grant price (e.g. lower of beginning or ending of period - monthly, quarterly, semi-annual, annual??), it's impossible to say with certainty, but it would appear they based the ordinary income calculation on a FMV price of 30.67 ((120.11 / 26.108) + 26.0695).  \$26.07/\$30.67 corresponds to a 15% discount, which is common (maximum allowable for favorable tax treatment).   \$30.67 was the closing price on 1/3/2006, which would make sense if that is the date of grant and they employ a 'lower of' method.

For the dividends, he should have received a 1099-DIV and paid taxes in the year received (2006).  When he sells those shares, he would have basis in them equal to what was previously recognized (presumably 4.15 (6.11 - 1.96) and 4.16 (6.06 - 1.90) for the two shown below.

Your dividend calculation makes sense to me, and I too have no idea why you are only showing .112 shares instead of .1625.  Could it be he previously disposed of part of these partial shares?

Bingo, I just checked the math and what you said worked out.  He actually purchased the stock closer to 27% off FMV on the day of the transaction, what a great deal!  I was thinking he had \$7,000 in unreported income in addition to \$28,000 in capital gains on a \$65k account.  Good to know that \$7k is already included in their unrealized gains column.

He has never disposed of any shares.  Hopefully he can fill me in on the details a little more next time I talk to him.  Right now I am trying to piece it together without all the information.  I want to make sure I have a firm grasp of the tax consequences before I advise him to sell it all.