Answer:
Taxes on January 1, year 1= $1400
Taxes on Dec 31, year 4=$3300
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
<em>Lets assume income tax is 20% and marginal tax rate is 10%,</em> 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).
