U.S. Federal Income Tax Information for Employee Stock Purchase Plan
This guide was developed from general tax law and is not intended to be a source document as proof of individual tax liability.
Overview of Tax Considerations
Specific questions about your cost basis and your particular tax situation should be referred to your tax advisor.
Shares acquired through the Employee Stock Purchase Plan (ESPP) are acquired by the employee at a discount from the stock price at the time of purchase. Currently, the discount rate is five percent. The previous discount rate was at 15 percent. Please review your purchase details to determine the applicable discount rate.
This web page provides an overview of the tax considerations regarding ESPP shares.
- Determine Purchase Details
- IRS Section 6039 Regulation-Form 3922
- Section 423 Dispositions: Determine Disposition Type
- Wash Sales
- Offering Period Details
- Related Information
Determine Purchase Details: Section 423 Component or Non-Section 423 Component
The Plan is generally intended to qualify as an ESPP within the meaning of IRC Section 423, although there is also a Non-423 Plan Component. First, determine if the purchase was made under the "423 Component" or the "Non-423 Component" of the ESPP.
Section 423 Component
Under the "Section 423 Component" of the ESPP, you are not taxed on the discount (also called the company contribution) on the date of purchase, but when the shares are sold or disposed. Your cost basis for the shares will be the purchase price you paid for the shares plus any ordinary income recognized upon the sale or disposition of the shares. The difference between the amount you receive upon the sale or disposition and your cost basis will determine the amount of the capital gain or loss to be recognized.
In order to determine the ordinary income amount, if you participated under the "423 Component", you will need to determine if the sale or disposition constitutes a qualifying or disqualifying disposition, as further described below, by reviewing each ESPP sale or disposition and the purchase details.
Non-Section 423 Component
Under the "Non-Section 423 Component" of the ESPP, federal and state income tax on the company contribution is due when the shares are purchased, not sold. Taxes are withheld from the first paycheck following a purchase date. Your cost basis in the shares is generally equal to the sum of the purchase price paid for the shares and the amount of the company contribution. The difference between the amount you receive upon the sale or disposition of your shares and your cost basis will treated as either a capital gain or loss.
IRS Section 6039 Regulation-Form 3922
SAIC is required under Section 6039 of the Internal Revenue Code to report specific information to the IRS and ESPP participants on Form 3922 or an acceptable substitute form for those employees who participate in the Section 423 Component of the Plan. As the administrator of SAIC's ESPP, Computershare Shareowner Services ("Computershare") will provide this form on behalf of SAIC, the issuer to all employees who purchase shares via the ESPP. This form will be postmarked no later than January 31st for the previous calendar year.
The information provided on the Form 3922 to both you and the IRS contains details for your ESPP purchases for the previous calendar year. You will need this information when you complete your income tax return for the calendar year in which you sell (or otherwise dispose of) the shares from your ESPP purchase.
THIS STATEMENT IS FOR INFORMATION PURPOSES ONLY. There is likely no immediate action required. ESPP plan participants are not required to report this information to the IRS until they sell or otherwise dispose the shares. This form should be kept and used to figure the gain or loss for the year in which stock is sold or otherwise disposed of.
Information on the Form 3922, 1099-B and W-2 (for disqualifying dispositions only) will assist in determining cost basis when reporting stock sales on the tax return for the year in which stock is sold or otherwise disposed of. The discussions and examples below of disqualifying and qualifying dispositions provide additional assistance in understanding this confusing topic.
Section 423 Dispositions: Determine Disposition Type
Qualifying Disposition - Section 423 Component
For Pre-October 2006 purchases, there is a "qualifying disposition" of an ESPP share if a sale or disposition is made after you have held the shares for at least two years after the purchase date. Generally, you should report as ordinary income for the taxable year of the sale or disposition an amount equal to the lesser of (i) the company contribution or (ii) the amount by which the fair market value of the shares at disposition exceeds the purchase price.
The following example is presented for informational purposes only.
| Note: The following example assumes a purchase price discount rate of five percent. The participant sells stock more than two years after the Purchase Date. |
||||
|---|---|---|---|---|
| ASSUMPTIONS | ||||
| Discount Rate | 5% | 5% | 5% | |
| A | Purchase Date Market Value | $ 18 | $ 18 | $ 18 |
| B | Purchase Price (Employee Purchase Price/Discounted Price) | $ 17.10 | $ 17.10 | $ 17.10 |
| C | Sale Price/Sale Date Market Value | $ 22 | $ 17.50 | $ 10 |
| Actual gain (loss) (C - B) | $ 4.90 | $ 0.40 | $ (7.10) | |
| CALCULATIONS | ||||
| Company Contribution (A - B) | $ 0.90 | $ 0.90 | $ 0.90 | |
| Actual Gain on Sale (C - B) > 0 | $ 4.90 | $ 0.40 | $ - | |
| TAX CONSEQUENCES | ||||
| D | Ordinary Income | $ 0.90 | $ 0.40 | $ - |
| <lesser of company contribution or Actual Gain on Sale> | ||||
| Long-term capital gain (or loss) (C - D - B) | $ 4.00 | $ - | $ (7.10) | |
| <Sale Price, less Ordinary Income, less Purchase Price> | ||||
For Post-October 2006 purchases, there is a "qualifying disposition" of an ESPP share if a sale or disposition is made after you have held the shares for (i) more than two years after the Offering Date and (ii) more than one year after the Purchase Date. Generally, you will recognize ordinary income on the lesser of (i) discount rate times the fair market value at the beginning of the Offering Period or (ii) the difference between the amount you receive upon the sale or disposition of the ESPP shares and the purchase price.
The following example is presented for informational purposes only.
| Note: The following example assumes a purchase price discount rate of five percent. The participant sells stock more than one year after the Purchase Date and more than two years after the Offering Date. |
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|---|---|---|---|---|
| ASSUMPTIONS | ||||
| A | Discount Rate | 5% | 5% | 5% |
| B | Offering Date Market Value | $ 15 | $ 15 | $ 15 |
| C | Purchase Date Market Value | $ 18 | $ 18 | $ 18 |
| D | Purchase Price (Employee Purchase Price/Discounted Price) | $ 17.10 | $ 17.10 | $ 17.10 |
| E | Sale Price/Sale Date Market Value | $ 22 | $ 17.75 | $ 10 |
| Actual gain (loss) (E - D) | $ 4.90 | $ 0.65 | $ (7.10) | |
| CALCULATIONS | ||||
| Discount at Enrollment (B x A) | $ 0.75 | $ 0.75 | $ 0.75 | |
| Actual Gain on Sale (E - D) > 0 | $ 4.90 | $ 0.65 | $ - | |
| TAX CONSEQUENCES | ||||
| F | Ordinary Income | $ 0.75 | $ 0.65 | $ - |
| <lesser of Discount at Enrollment or Actual gain on sale> | ||||
| Long-term capital gain (or loss) (E - F - D) | $ 4.15 | $ - | $ (7.10) | |
| <Sale price, less Ordinary Income, less Purchase Price> | ||||
Any additional gain recognized upon a qualifying disposition will be a capital gain. If the fair market value of the shares on the date of the qualifying disposition is less than the purchase price you paid for the shares, there will be no ordinary income, and any loss recognized will be a capital loss.
Disqualifying Disposition - Section 423 Component
There is a "disqualifying disposition" of an ESPP share if a sale or disposition is made within two years of the beginning of the Offering Period in which such stock is purchased or within one year after the purchase of such stock. For purchases made prior to October 2006, there is a disqualifying disposition if a sale or disposition is made within two years of the purchase date.
The difference between the fair market of the ESPP shares on the purchase date and the ESPP purchase price (company contribution) will be ordinary income and reported as compensation on your Form W-2 in the year of a "disqualifying disposition."
Any additional gain recognized upon a disqualifying disposition will be a capital gain (short-term or long-term, depending on how long you held the shares).
The following example is presented for informational purposes only.
| Note: The following example assumes a purchase price discount rate of 5 percent. The participant sells stock within one year after the Purchase Date or within two years after the Offering Date. |
||||
|---|---|---|---|---|
| ASSUMPTIONS | ||||
| A | Discount Rate | 5% | 5% | 5% |
| B | Purchase Date Market Value | $ 18 | $ 18 | $ 18 |
| C | Purchase Price (Employee Purchase Price/Discounted Price) | $ 17.10 | $ 17.10 | $ 17.10 |
| D | Sale Price/Sale Date Market Value | $ 22 | $ 17.75 | $ 14 |
| Actual gain (loss) (D - C) | $ 4.90 | $ 0.65 | $ (3.10) | |
| TAX CONSEQUENCES | ||||
| E | Ordinary Income (B - C) | $ 0.90 | $ 0.90 | $ 0.90 |
| <excess of purchase date market value over purchase price> | ||||
| Capital gain (or loss) (D - E - C) | $ 4 | $ (0.25) | $ (4) | |
| <sale price, less ordinary income, less purchase price> | ||||
Wash Sales
A "wash sale" is created when a stockholder has a qualified acquisition of shares in the same account within 30 days before or 30 days after (61-day period) a sale of a "covered lot" of shares, at a loss. If the sale is a wash sale, you cannot deduct any or a portion of the resulting loss if, within the period beginning 30 days before the date of the loss sale and ending 30 days after that date, you acquire "substantially identical" stocks or securities. However, the loss will generally be allowed to increase your cost basis in the "new stock" by the amount of loss that was disallowed. The holding period of the wash sale is added to the holding period of the "replacement shares."
Under the new regulations, the tracking and reporting of wash sales will now be reported by the broker or agent for covered securities. Previously, it was the stockholder's responsibility to track and properly report wash sales. For SAIC, wash sales will most likely occur for shares sold and purchased within the ESPP. If you sell shares from your ESPP account at a loss within 30 days prior to or after a quarterly ESPP purchase date, all or a portion of that loss will be disallowed and added to the cost basis of your newly purchased shares.
Wash Sales Examples
The following examples are presented for informational purposes only.
| Assumptions | ||
| A | Purchase date June 30, 2011, fair market value (FMV) of shares at $20.00/shr Shares purchased at 5 percent discount, 100 at $19.00 /shr | $1,900.00 |
| B | Discount amount, 100 at $1.00/shr | $100.00 |
| C | Shares sold on July 1, 2012, 100 at $17.00/shr (from June 30, 2011, acquisition date) | $1,700.00 |
| D | Purchase date June 30, 2012, FMV of shares at $18.95 Shares purchased at 5 percent discount, 100 at $18.00/shr | $1,800.00 |
| Calculations | ||
| Sale of the June 30, 2011, acquired shares on July 1, 2012, results in a disqualifying disposition of shares. The discount amount (B) is reported as ordinary income on Form W-2 and added to the cost basis of the shares acquired on June 30, 2011 (A). | ||
| E | Adjusted cost basis of shares purchased on June 30, 2011, after disqualifying disposition (A + B) | $2,000.00 |
| F | Purchase of replacement shares on June 30, 2012, results in a wash sale. Disallowed loss (added to cost basis of shares purchased on June 30, 2012,) (C - E) | $300.00 |
| Tax Consequences | ||
| Adjusted cost basis of shares purchased on June 30, 2012, (D + F) | $2,100.00 | |
| Assumptions | ||
| A | Purchase date June 30, 2011, fair market value (FMV) of shares at $20.00/shr Shares purchased at 5 percent discount, 100 at $19.00 /shr | $1,900.00 |
| B | Discount amount, 100 at $1.00/shr | $100.00 |
| C | Purchase date June 30, 2012, FMV of shares at $27.37/shr Shares purchased at 5 percent discount, 200 at $26.00/shr | $5,200.00 |
| D | Shares sold on July 1, 2012, 100 at $14.00/shr (from June 30, 2011, acquisition date) | $1,400.00 |
| Calculations | ||
| Sale of the June 30, 2011, acquired shares on July 1, 2012, results in a disqualifying disposition of shares. The discount amount (B) is reported as ordinary income on Form W-2 and added to the cost basis of the shares acquired on June 30, 2011 (A). | ||
| E | Adjusted cost basis of shares purchased on June 30, 2011, after disqualifying disposition (A + B) | $2,000.00 |
| F | Disallowed loss (added to cost basis of shares purchased on June 30, 2012) (D-E) | $600.00 |
| Tax Consequences | ||
Adjusted cost basis of shares purchased on June 30, 2012,
| $2,600.00 $3,200.00 $5,800.00 | |
| Assumptions | ||
| A | Purchase date June 30, 2011, fair market value (FMV) of shares at $20.00/shr Shares purchased at 5 percent discount, 100 at $19.00 /shr | $1,900.00 |
| B | Discount amount, 100 at $1.00/shr | $100.00 |
| C | Purchase date June 30, 2012, FMV of shares at $27.37/shr Shares purchased at 5 percent discount, 25 at $26.00/shr | $650.00 |
| D | Shares sold on July 1, 2012, 100 at $14.00/shr (from June 30, 2011, acquisition date) | $1,400.00 |
| Calculations | ||
| Sale of the June 30, 2011, acquired shares on July 1, 2012, results in a disqualifying disposition of shares. The discount amount (B) is reported as ordinary income on Form W-2 and added to the cost basis of the shares acquired on June 30, 2011 (A). | ||
| E | Adjusted cost basis of shares purchased on June 30, 2011, after disqualifying disposition (A + B) | $2,000.00 |
| F | Total loss on sale of shares on July 1, 2012 (D -E) | $600.00 |
| G | Portion of loss which is disallowed (and added to cost basis of shares purchased on June 30, 2012) (25/100 * F) | $150.00 |
| Tax Consequences | ||
| Adjusted cost basis of shares purchased on June 30, 2012 (C + G) | $800.00 | |
| The remainder of the loss on sale of shares on July 1, 2012, is allowed (F - G) | $450.00 | |
Offering Period Details
Under the SAIC 2006 Employee Stock Purchase Plan (112k), the Offering Period is generally the three month period prior to the purchase date commencing on January 1, April 1, July 1, and October 1 of each calendar year. The Fair Market Value at Offering Date and Purchase Date is the closing sales price of the SAIC common stock (NYSE: SAI) on the prior business day.
For example:
| Offering Date: | April 1, 2009 | Offering Date Price $18.67 (SAI close March 31, 2009) | |
| Purchase Date: | June 30, 2009 | Purchase Date Price $18.51 (SAI close June 29, 2009) |