An employee stock purchase plan (ESPP) enables an employee to purchase company stock often at a discount from the market price. Typically an employee buys the stock with payroll deductions of up to 15% of their paycheck; the employee decides how much, but there is a $25,000 annual maximum. An ESPP is a way for an employee to purchase company stock easily and on favorable terms, giving the employee an opportunity to share the potential growth of the companys stock.
Example: Under an employee stock purchase plan, an employee exercised his option to purchase a share of the companys stock. At the time the option was granted, the market value of the stock was $100. Instead of selling the stock, the employee makes a gift of the stock on that day to his child. In such case, $15 is includible as compensation in the employees gross earnings. The employees cost basis of $85 is increased by $15, the amount included in the employees gross earnings. Thus, the employees basis for the stock is $100, which becomes the childs basis at of the time of the gift, for determining gain or loss when the stock is liquidated to pay for college.
An employee stock purchase plan may enable you to purchase company stock at a discount.