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UPDATED: Restricted Stock or Stock Option Taxation Relief?


Under a provision of the tax law passed at this time, last year, there may be an opportunity for a recipient of stock options, restricted stock or RSUs (restricted stock units) to defer the taxation that would otherwise occur.  It is, as you may surmise, subject to many caveats.

To qualify, the company (or any predecessor) issuing the compensation may not now, or ever, have been a “listed company” (it may not be trading on an exchange), prior the point in time that taxation would occur under normal rules for the equity interest granted.

Employees excluded from using this provision are;

    • 1% or more owners;
    • the CEO or CFO;
    • their relatives;
    • the top 4 highest compensated officers, including anyone who was one of these people during the last 10 years; and
    • part-time employees, at least 80% of all employees

To be able to use this provision, qualified employees must have been granted one of the three types of equity compensation (stock options, restricted stock or RSUs) by the company to use this provision.

The employee may not have elected immediate taxation on the equity compensation under Section 83(b) of the Internal Revenue Code.

The company may not have redeemed any of its stock in the calendar year immediately preceding the taxable event unless at least 25% of the total dollar amount of the redemption is deferral stock.

The transfer of the stock does not include the ability of the employee to sell the stock back to the company or to elect to receive cash in place of company stock at the time the stock would be taxable to the employee.

The company must have a written plan to grant under which 80% or more of non-excluded employees are to be granted equity interests. The company must also NOT have made an election that prevents employees from making this election.

The company is required to notify the employee, either at the time or at some reasonable date in time before the date that taxation occurs under the terms and conditions that apply to the equity interest that has been granted to the employee, that the deferral election is available for the stock.

What, you ask, is the deferral obtained under this provision, if all these conditions are met?

The INCOME tax due at the time is postponed.  The Social Security taxes are, however, due at that time.

How long is the income tax liability deferred?  The income tax will be due at the earliest of:

    • The date the stock becomes transferable, including to the employer;
    • The date the employee becomes one of the disqualified employees described above;
    • The date the stock becomes readily tradeable on an established securities market;
    • The earliest date that is either five (5) years after the date the employee may transfer their rights to the stock or their rights are no longer subject to a substantial risk of forfeiture; or
    • The date the employee revokes the election, in the manner specified by the IRS.

What happens if the stock value declines?  Once the deferral election is made, the amount that would have been originally taxable as income to the employee will be the amount that will be taxable on the date set under the schedule in the immediately preceding answer to the question as to the length of the deferral.

How is the deferral election made? 

The employee must provide an election specifying that the deferral election under IRC Section 83(i) is being made, together with their name, address, SSN, the employer, the quantity of stock involved, its value and the amount of any payment made to acquire the stock signed under the penalties of perjury within 30 days of the taxation event, with a copy sent to the employer and another to the IRS where they file returns.  The stock covered by the election must be escrowed as security for payment of the income taxes due.

Mark H. Misselbeck, C.P.A., M.S.T. is a Tax Principal at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.

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Waltham, MA 02453
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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