ESPP cost basis calculation by TurboTax seems incorrect

[labrat1]

I sold certain shares of a company purchased via ESPP obtained @ a 15% discount as a qualifying disposition but TurboTax seems to be calculating the cost basis as incorrect.

[labrat1]

The share price was $26 on grant date and $21.6 on offering end date. So it was purchased @ 18.36 ( 15% discount on $21.6).

[labrat1]

No of shares are 31. The compensation income should be $100.44  but TurboTax somehow calculates it as $120.90 which I do not understand. Please clarify

[labrat1]

compensation income should be 21.6 - 18.36 multiplied by 31 shares right?

[TomYoung]

Can't really say because you've left out how much you sold the stock for.

[labrat1]

OK , Sure 29.39.

[TomYoung · Accepted solution]

In the case of a Qualified sale the compensation income is the lesser of

The discount applied to the grant price: 15% x $26 x 31 = $120.90

The actual gain based on your out of pocket cost 31 x ($29.39 - $18.36) = $341.93

(Tax regulations issued in 2009 specify that in some situations the end of the offering period (when you purchase the shares) will be considered the grant date. Your company should inform you if this is the case.)

Tom Young

[rysilva]

This is really helpful and also really weird. I had stock worth $76.27 at beginning, $57.90 at end, purchase price $49.22. I sold at $67.51. It seems so strange to me that my "income" portion is 15% of $76.27, an amount that could never have actually been real income, especially when the actual discount my company gave me was 15% off $57.90.

[TomYoung]

Every year I answer lots of ESPP questions and I simply marvel at the complexity that the Government has imposed on ordinary working stiffs.

[labrat1]

In the case above, I feel amount between 49.22 and 57.90 should be considered income and the amount between 57.90 and 67.51 is actual capital gains. It seems like a reasonable way.

[lm171]

Hi Tom:

I was just reading this question in 2019.  My situation is that the company changed its ESPP from the purchase of the shares ( 15% discount)  at the lower of  the beginning  (quarterly)  or the end of the period FMV  to the end of the period FMV at a 5% discount.  The question is do I still from a tax point of view take the lower of the beginning and end FMV to compute the compensation income?

thank you,

Lina 

[DaveF1006]

When you enter in stock information regarding your ESPP sales, there will be a screen that asks if you need for Turbo Tax to help determine your cost basis:

1. After you enter your details on the sale, the very next screen you come to will ask Let us know if you'd like to make any changes to the cost basis 
2. Next screen will say Next, we'll help you figure out your cost basis
3. You will continue until you reach a screen that says Now, we'll walk you through entering the rest of your sales info
4. then it will ask you questions regarding the 3922 you received from your employer
5. In the 3922 it will ask for the FMV on the grant date and also the FMV on the exercise date. This is where those discount percentage difference would be reported. 

[lm171]

Hi Dave,

Thanks for your reply.   I would like to give you a more specific example to explain.

As of, Jan 1, 2006 the employer changed the ESPP as follows.  the plan provides for a quarterly purchase period.  The price at which you are able to purchase the shares is based on the actual share price at the end of a quarterly purchase period less a discount of 5%.

Quarterly period 4/3/2006 -  6/30/2006

4/3/2006 grant date the FMV/share is $70.60.  Price/share as if Exercise on grant date is $67.07

6/30/2006 exercise date the FMV/share is $59.82.  Price/share on exercise date is $56.82  (Which is the actual exercise price).     All the sales were qualifying dispositions.

Entering the information using the Turbotax "we'll walk you through entering the rest of your sales info"

Turbotax concludes as follows:

a) FMV on date of purchase less exercise price  $3.00

b) Discount as if Exercise on Grant date                $3.53

c) Net Sales proceed less exercise price paid      $118.64     (sale price per share was $175.457)

d) Lesser of  (b) or (c)                                                     $ 3.53

e) Compensation income is (a) if disqualifying and (d) if qualifying   $3.53

I don't understand this result.  Is this correct?

Thanks, Lina