Tuesday, June 25, 2019
As an employee at Nike, you have access to a wealth of benefits. Some of them, such as health insurance and a 401(k) plan, are relatively standard. That said, working at a larger, publicly-traded company does afford some additional perks. One of those perks is access to the Nike employee stock purchase plan (ESPP).
An ESPP is a benefit Nike offers to their employees to purchase Nike stock at a discount from a designated purchase price. Plain and simple, it is a way for you to benefit from the company’s long-term growth. Fully participating in the program makes sense for most employees, but questions arise around what to do with shares once you receive them and how they impact your taxes.
How much can I contribute?
Nike allows participants in the ESPP to designate up to 10 percent of their eligible pay to purchase up to the lesser of $25,000 or 500 shares of Nike stock in a calendar year.
What price do I pay for the stock?
Offerings begin on April 1 (ending on September 30) and October 1 (ending on March 31 the following year). The first day of each offering is the offering date and the last day is the purchase date. Your purchase price of the stock is 85 percent of the lower of the market value as of the offering date OR the purchase date. That is, as the stock rises during the offering period, your discount can be substantially higher than 15 percent. At a minimum, your discount will be 15 percent off the current fair market value of the stock.
What happens when I sell the stock?
Two separate dispositions can take place with ESPP shares, either a qualifying or a non-qualifying disposition:
- A qualifying disposition occurs after you have held the stock for at least one year from the purchase date, and two years from the offering date. With a qualified disposition, you are still taxed at ordinary income rates on the discount, but any growth in the stock price is taxed at long-term capital gains rates.
- A disqualifying disposition is any sale that occurs on a timeline that does not meet the standard for a qualified disposition. In this scenario, the entire discount you received on the purchase date plus any gain in the value of the stock after the purchase date is taxed at ordinary income rates. It is also possible that if the stock falls in value, you will report ordinary income in addition to a capital loss in the same tax year.
Should I participate in the Nike employee stock purchase plan?
If you have a firm handle on your cash flow and are eager to take advantage of the company’s potential growth in the coming years, the Nike employee stock purchase plan is a no-brainer.
Consider your opportunity costs as you evaluate whether to hold company shares over the long term, such as the paydown of debt or a diversified portfolio. What impact would the fluctuation of the stock price have on your goals?
If you have been participating in the ESPP for a long period of time, you may have too much concentration risk in your balance sheet. If your income ramps up in the future and you need to further diversify your portfolio, the capital gains upon sale can jump up from 15 percent to 23.8 percent. Understanding your total financial picture is important in determining a course of action.
Brighton Jones has offered integrated tax and Personal CFO services in the greater Pacific Northwest for the last 20 years. If you are looking for help in defining your financial future and aligning your money with your passions and purpose, don’t hesitate to contact our team.
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