Tracking ESPP Discount as Income?

kcoop

Since it appears Quicken for Mac doesn't have explicit support for ESPP purchases, what's the suggested way to track the income associated with the share price discount?

Tom Young

This is potentially a very complicated issue. 

Just to make sure we're on the same page here, there's "Qualified" and "NonQualified" ESPPs.  With a Qualified ESPP compensation (if there is any*) is created at the sale of the stock while with a NonQualified ESPP compensation associated with the discount should be showing up on a W-2 associated with the purchase.  

Assuming this is a Qualified ESPP, assuming that compensation is created by the sale, and assuming Mac has similar capabilities with RtrnCap  and MiscInc transactions, then one way of dealing with this would be:

1. At the time of the purchase, record the purchase of the stock in the usual manner, at the discounted price.
2. At the time of the sale if the discount is going to be recognized as compensation do a RtrnCap action entering the amount as a negative number.  This brings the stock's basis up to the correct amount and puts the Account in a negative cash position.
3. Enter a MiscInc action in the amount of the discount with the offset being to some sort of "compensation" Category, zeroing out the cash.
   
4. Sell the stock, at the correct gain or loss.
   

*Compensation should always be created with the sale of the stock if the sale is "Disqualifying" but may or may not be created with a Qualifying disposition.

Tom Young

This is potentially a very complicated issue. 

Just to make sure we're on the same page here, there's "Qualified" and "NonQualified" ESPPs.  With a Qualified ESPP compensation (if there is any*) is created at the sale of the stock while with a NonQualified ESPP compensation associated with the discount should be showing up on a W-2 associated with the purchase.  

Assuming this is a Qualified ESPP, assuming that compensation is created by the sale, and assuming Mac has similar capabilities with RtrnCap  and MiscInc transactions, then one way of dealing with this would be:

1. At the time of the purchase, record the purchase of the stock in the usual manner, at the discounted price.
2. At the time of the sale if the discount is going to be recognized as compensation do a RtrnCap action entering the amount as a negative number.  This brings the stock's basis up to the correct amount and puts the Account in a negative cash position.
3. Enter a MiscInc action in the amount of the discount with the offset being to some sort of "compensation" Category, zeroing out the cash.
   
4. Sell the stock, at the correct gain or loss.
   

*Compensation should always be created with the sale of the stock if the sale is "Disqualifying" but may or may not be created with a Qualifying disposition.

kcoop

Ah! RtrnCap (or "Return of Capital" on Mac), that's exactly what i was looking for, thanks!

Pharmwheel

Tom,

What's the best way to track a stock option grant? On the vesting date I would simply add the shares to the account and set the purchase price as the strike price at the time of vesting. But when I sell the shares should I subtract the original strike price as a return of capital?

On a separate note, before I sell the options, how do I make sure the account reflects the actual value of the stock options since the value up to the strike price is not technically owned by me? Up to now, I've been creating dummy stocks (e.g. Stock ABC - Option) that I sell on the grant date to offset the ABC Stock value (so they have a negative value). I then buy them back when I sell ABC stock.

I'm thinking there must be a better way to handle this using the return of capital feature.

Tom Young

"What's the best way to track a stock option grant? On the vesting date I would simply add the shares to the account and set the purchase price as the strike price at the time of vesting. But when I sell the shares should I subtract the original strike price as a return of capital?"

I'll assume we're talking about Non-Qualified options.  If that's the case then the answer to your question is "NO." 

At exercise the stock has a basis that's the same as the FMV of the stock at exercise, so to properly value the stock you'd want to enter a negative number as a Return of Capital calculated as: ("spread" between per share FMV at exercise and the per share strike price) x (number of shares exercised).  That would bring the stock's cost up to the correct basis and result in negative cash in the Account.  Then you'd make an entry for the same amount, except as a positive number. and recognize compensation income.

"On a separate note, before I sell the options, how do I make sure the account reflects the actual value of the stock options since the value up to the strike price is not technically owned by me?"

I think you're talking about the time between grant and vest?  If that's the case then it's tough to value those options.  You don't own the stock, you have no idea what the price will be in the future, maybe the option expires worthless.  There are option valuation models like Black-Scholes and others and I suppose you could use something like that but it's certainly not a value that directly related to the current price of the stock.