Question

On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. Dave’s restricted shares will vest at the end of year 2. He intends to hold the shares until the end of year 4 when he intends to sell them to help fund the purchase of a new home. Dave predicts the share price of RRK will be $30 per share when his shares vest and will be $40 per share when he sells them. (Leave no answer blank. Enter zero if applicable. Input all amounts as positive values.) Problem 12-33 Part b b. If Dave’s stock price predictions are correct, what are the tax consequences of these transactions to RRK?

Answer 1

RRK Corporation may take a tax deduction equal to the ordinary income recognized by employee Dave when the restricted stock vests at the end of year 2. The company has no further tax consequences when Dave sells his shares at the end of year 4.

Step-by-step explanation:

The tax consequences to RRK Corporation for issuing restricted stock which Dave received are primarily concerned with the time when Dave's stock vests. However, it's important to note that in general, companies do not recognize a tax event upon the vesting of restricted stock granted to employees; instead, the company gets a tax deduction at the time the employee includes the income on his tax return, which is typically at vesting. The company's tax deduction is equal to the amount that is counted as ordinary income by the employee. Assuming this holds true for RRK, when Dave's restricted stock vests at the end of year 2, and if the stock price is $30 per share as he predicts, RRK would get a tax deduction of $30,000 (1,000 shares × $30 per share) which is the amount included in Dave's income.

When Dave sells the shares at the predicted price of $40 per share at the end of year 4, RRK would have no further tax consequences related to this transaction, as the tax implications of the sale would be specific to Dave and his capital gains tax liability. RRK already had their tax deduction opportunity at the point of vesting. RRK's tax considerations from this event are strictly limited to the ordinary income deduction corresponding to the stock's fair market value at the time of vesting.

Answer 2

Taxes on January 1, year 1= $1400

Taxes on Dec 31, year 4=$3300

Step-by-step explanation:

The question relates to 'EQUITY GRANT', which is some sort of compensation given to somebody, especially/specifically to employees of an entity provided that certain conditions/vesting requirements are satisfied by the employee.

Now on January 1, year 1 Dave has received 1000 shares, for him the shares received is treated is income for Dave, as the shares are being offered against certain services rendered by Dave to RRK corporation. So on January 1 Dave would record income and pay income tax as follows:

Value of shares on Jan 1/ income= 1000×$7

Value of shares on Jan 1/ income= $7000

Lets assume income tax is 20% and marginal tax rate is 10%, the tax consequences would be as follows:

TAXES = $7000×20%

TAXES = $1400

There will be no tax consequences at the vesting date and at the end of year 4 (the date when he sells them) there will be tax consequences of $4000.

At year 4 = 1000×$40

Amount realized= $40000 -$7000

Taxes at marginal rate= $33000×10%

Taxes at marginal rate= $3300

(Note: $7000 is subtracted because it's already present in $40000).