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Pre-IPO: Basics

UPDATES! Has there been a tax-law change for stock options and restricted stock units (RSUs) in privately held companies?

Yes, starting in 2018. Enacted in December 2017, the Tax Cuts & Jobs Act has a provision that gives employees in privately held companies extra time to pay federal income tax (though not state or FICA tax) on the income they recognize at option exercise or RSU vesting. Instead of paying taxes at the exercise of nonqualified options or at the vesting of stock-settled RSUs, employees will be allowed to elect to defer the resulting income, and thus the taxes on that income, for up to five years.

It is up to your company to choose whether to structure and make those types of tax-qualified grants under the new Section 83(i) of the tax code. Among the requirements, the grant must be made to 80% of eligible employees.

Key Facts For Tax Deferral Of Private Company Stock Grants

Eligible types of stock compensation NQSOs and RSUs
Tax deferred Federal income tax
Deferral period Five years, unless triggered earlier
Election required 83(i) election within 30 days of exercise or vesting
Company requirements Numerous, including grants to 80% of employees

For further details about this new type of qualified equity awards, see the related article elsewhere on this website.

Legislative Background

Details about the legislation's long development are available in commentaries at the myStockOption blog: its introduction, House approval in 2016, and reintroduction in 2017, when it was separately considered as the Empowering Employees Through Stock Ownership Act.

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