Has there been a tax-law change for stock options and restricted stock units (RSUs) in private companies?
Yes. In 2018, the Tax Cuts & Jobs Act introduced a type of equity award that gives employees in private 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 (not ISOs, ESPPs, or restricted stock)|
|Tax deferred||Federal income tax (not Social Security, Medicare, or state taxes)|
|Deferral period for income recognition||Five years, unless deferral period ends earlier (e.g. IPO, acquisition) or employee chooses to pay earlier|
|Election required||83(i) election made with IRS within 30 days after exercise or vesting (settlement date for RSUs)|
|Company requirements||Numerous, including requirement to make qualified grants to 80% of eligible employees in the same year|
For further details about this new type of qualified equity awards, see the related article elsewhere on this website.
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.
Editor's Note: In Notice 2018-97, the IRS provided guidance on selected aspects of the new Section 83(i), including the requirements that grants be made to 80% of employees, the income tax withholding on the deferred income, and how companies can opt out of permitting employee to make the deferral election. For more details on this topic, see the related commentary at the myStockOptions blog.