Obscure Tax Provision Could Provide Tax Relief to Certain Employees Receiving Equity Compensation
By Marc Armstrong CPA®, CFA®
Exercising non-qualified stock options (NSOs) to buy company stock or receiving restricted stock units (RSUs) at below fair market values generally trigger a tax bill equal to the difference between the exercise price and the market price on the day the option is exercised or the restricted stock is received. This can create situations where the employee has triggered a large tax liability and has no avenue to raise the money needed to cover this liability.
Congress has addressed this issue by providing an opportunity for qualified employees of private companies to defer the federal income taxation for up to five years on the exercise of NSOs or upon settlement of RSUs.
Please note these rules apply to stock attributable to NSOs exercised, or RSUs settled, after December 31, 2017.
You may already be familiar with another tax election equity compensation called an 83(b) election. An 83(b) election gives an employee the option to pay taxes on the total fair market value of restricted stock at the time of granting. The 83(i) election can be made similarly. The election must be made no later than 30 days after the NQSs or RSUs are exercised and no longer subject to vesting. The employee must file the 83(i) election form with the Internal Revenue Service by certified mail and provide the employer with a copy of the 83(i) election form. Please note an 83(i) election cannot be made if an 83(b) election was already made.
In addition, Section 83(i) election does not apply to incentive stock options. Moreover, an 83(i) election does not apply to Federal Insurance Contributions Act (FICA) taxes. As a result, even if an employee makes a proper 83(i) election, the employee and employer portion of FICA taxes will be due in the normal course — generally upon the exercise of an NSOs and upon the vesting or settlement of an RSU. Finally, the 83(i) election only applies to federal taxes. Unfortunately, California state taxes are not deferred under the election.
Moreover, there are several requirements that companies must meet to be able to issue eligible stock compensation. If you are interested in making this election, you should check with an appropriate person at your company to see if your equity compensation qualifies.
Please consult your GK advisor if you have any questions.
Marc Armstrong is a Financial Advisor of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately $1.2billion in assets under management as of 02/10/20. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. "All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results."
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice.