NQSO - 409a penalty on stock options - how to avoid

Technical topics regarding tax preparation.
#1
Elie  
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Israel
Hi all,

This probably has been discussed in the past but i couldn't find.

Taxpayer, US citizen living abroad and working abroad, is granted stock options of a private foreign company in exchange for services as a self employed. The stock options have an exercise below the stock's FMV at the time of grant. So it seems that there is 409a penalty exposure. What are the ways to avoid the penalty?

Can it be as simple as just reporting additional income on the tax return for the year in which the options were granted? The income would be the difference between the exercise price and FMV at the time of grant. This way there is essentially no deferral of income.

TIA for any comments and insight :)
 

#2
sjrcpa  
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Does TP work for a US company?
 

#3
Elie  
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No. He works for a foreign company. Why would it matter?
 

#4
Elie  
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Hi all,

does anyone have anything to share on this topic?
am i able to avoid 409a penalty exposure by just picking up ordinary income (FMV of stock at date of grant minus exercise fee) on the tax return for the year in which the options were granted? and then the rest of the ordinary income will be taxed at exercise as a regular NQSO.

thanks i really appreciate any comments.
 

#5
KoiCPA  
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I took a quick look at the penalties under 409A and it looks like all penalties are based on the amount of income you did not recognize (i.e. only the deferred amount is penalized). So, yes, you could just report the whole amount at FMV.

I would make sure this is clearly disclosed to the taxpayer in writing, maybe even get them to sign off on it. I don't usually bother with such things, but if the client ever gets this reviewed by another tax pro, memories will be short about why he paid more tax than he had to.
 

#6
JAD  
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409A is brutal. If it were me, I'd consult with a specialist. I had a potential 409A issue once. The client wanted me to take the lead on the issue. I told him that I could start reading now, and by Christmas I still would not be confident that I had my arms around it. We kicked it upstream.
 

#7
Elie  
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Israel
Just saw the responses. Thank you!
 


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