For Public Company employees paid with Stock Options or Restricted Share Units
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For the definitive guide on tax-smart giving strategies in 2020, download the PDF below. Discuss this with your financial advisor and start planning now. These strategies are limited to the 2020 tax year only.NCF-California-CARES-Act-Bryan
Bryan: Hey, it’s Bryan and Bob from National Christian Foundation, California. This year, as you may know, we’ve been hit with Coronavirus, and that has caused all kinds of havoc, but the CARES Act has been a bit of a silver lining. Within the CARES Act, there are these charitable provisions. And Bob, it’s my understanding that, under the CARES Act you can deduct 100% of your income this year and this year only. And so, in the case that we’re talking about today, if you’re an executive that gets executive compensation, like non-qualified stock options, things like that you could exercise those options this year, gift them and not pay any tax. It’s kind of a once in a lifetime kind of thing. Do I have that right? Is that your understanding?
Bob: That’s exactly right. It’s a unique opportunity and because there’s 100% deduction, you can voluntarily increase your income by doing things like exercising options, and then deduct the full amount if you give it away. Pretty cool.
Bryan: Very cool. So, why don’t we take a look at Tom Tech? I think you’ve got a great example of this that will get it down to the ones and zeros.
Bob: All right so, Tom Tech. Tom is a 35-year-old Facebook engineer or, in Facebook language, “an old guy”. He received options on 10,000 shares of Facebook in 2011 at $25/share. They went public in 2012. This year, Tom decides to exercise his options, and Facebook is at $175/share. We’ll come back to that number in a minute because it’s really interesting.
So, here is Tom’s normal option payday, this is what happens most of the time when someone’s exercising options. First, he has to pay Facebook $250,000 because that’s $25 times 10,000 shares. With Facebook now trading at $175/share, he recognizes $1,500,000 in ordinary income. He gets shares worth $1,750,000, but he paid $250,000 for them, and now has $1,500,000 of ordinary income gain. If long ago he filed something called an 83(b) election it could be capital gain, but it would still be a big income number.
Well, Tom doesn’t have $250,000, which is typical, so he’s going to do a cashless exercise by selling his shares the same day he gets them. Living in California, that means he gets to keep a little bit over $700,000 out of his $1.5 million in gain. Everything else goes to taxes.
Bob: But we know that Tom’s true passion is supporting ministries that use technology to alleviate third world poverty. There are some really cool ministries like that. And so, Tom is about to make those giving dreams come true, here’s how.
This is his charitable payday. With charitable giving as a goal, he has even better options. He’s going to exercise them, and pay $250,000 to Facebook; get the one $1.5M in cash and income from the stock options. Now, he’s going to donate to the technology poverty ministry, $1.3M. So, he still has $200,000 left. If he makes a charitable gift, he’ll pay $165,000 and change in taxes. He’ll have $34,250 personally. So when you add up the $1.3M ministry gift and the $34,000 of personal funds, his total benefit here is a $1,334,250.
Without the gift Tom starts with $1.5M, pays $784,500 in taxes [rather than $165,000 with the gift strategy], and has $715,000 left. Ouch, right? This is why people don’t exercise options until they have to.
Now, his effective tax rate on the charitable side is 11%; on the non-charitable side it’s 52%.
Bob: So, by using this strategy, Tom is saving $600,000 in taxes and he has a $1.3M charitable fund for giving right now, or in the future. It’s just totally cool.
Bryan: And I mean, we typically don’t see these kinds of numbers unless somebody is making a presale asset gift. I mean, he’s just giving cash. He’s able to redirect all dollars from taxes to a gift. It’s pretty incredible.
Bob: There are a lot of people, not just in the tech industries, but in any other successful industries, that are compensated primarily with stock options, and restricted share units, and things of that type. So, there’s a lot of people who could take advantage of this in the next six months.
Bryan: Excellent. All right. Well, that’s the strategy. Closing thoughts?
Bob: Yeah, there are a lot of options for gifting all or only a portion of your vested employment-based equity compensation. It’s a little bit of a tricky world, you have a lot of choices when you start looking at this. So, we’re happy to help you review those choices, and run illustrations to show how it would all work.
Our ministry is to help you with your giving. We don’t need to make the sale. It doesn’t matter if you end up making a gift to us or not. So, call us with your questions. And also keep an eye on our webpage, because for the rest of this year we’re going to be putting up information on how to take advantage of the 100% deduction under the CARES Act.
Bryan: If you know somebody who is not you, but has these kinds of compensation structures forward this video, and make sure they watch it because there’s a fantastic opportunity that’ll never happen again. So, thanks for watching. And we hope to hear from you.