It has been almost a year since President Trump signed into law the Tax Cuts and Jobs Act (the Act) on December 22, 2017. Since that time we have been diligently going over the law for changes that can impact your tax obligations and strategies. One change in the Act that you may not be aware of, but should, is the new Section 83(i) of the Internal Revenue Code (Section 83(i)).
Section 83(i) allows eligible employees to elect to defer federal income taxes for up to five years from the exercise of a stock option or the settlement of restricted stock units (RSUs) that occurs after December 31, 2017, subject to certain restrictions with regard to which companies and employees can qualify.
IRS Notice 2018-97, explains how to apply the new section. According to the related IRS release announcing the publication of the Guidance, “In general, executives, highly-compensated officers and those owning one percent or more of the corporation’s stock cannot make the deferral election. In addition, Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax payable on the value of qualified stock may not be deferred.”
Definitions Provided by IRS Notice 2018-97
In addition to identifying which qualified employees are entitled to the deferral, the Guidance provides for the following:
- It defines “qualified stock” as, “any stock in a corporation that is the employer of a qualified employee, if such stock is received (i) in connection with the exercise of a stock option or in settlement of a RSU, and (ii) such stock option or RSU was granted in connection with the performance of services as an employee and during a calendar year that the employer corporation was an eligible corporation.”
- It also defines an “eligible corporation” as, “any corporation that, with respect to any calendar year, (i) has none of its (or any predecessor’s) stock readily tradable on an established securities market during any preceding calendar year, and (ii) has a written plan under which, in such calendar year, not less than 80% of all employees who provide services to the corporation in the United States (or any possession of the United States) are granted stock options, or are granted RSUs, with the same rights and privileges to receive qualified stock.”
Other Taxing Concerns on 83(i)
The Notice also addresses a concern employers had about Section 83(i) in that they were worried about how to comply with their tax withholding obligations for up to five years, when the holder of the deferred stock may be a former employee. The Notice tackles this issue by now requiring a mandatory escrow of deferral shares by the employer until the date of the deferred tax withholding requirement is reached. Since the escrow is mandatory, this provision also prevents an employer from inadvertently issuing deferred options subject to 83(i). If they do not escrow the withholding, then the employee cannot take the 83(i) deferral, thus giving the employer some control over the election of the option.
The IRS says that taxpayers can rely on this initial Guidance, “until proposed regulations are issued and requests public comment on additional issues that should be addressed in those regulations.”
How MBAF Can Help
The recently released definitions and qualifications are not the final rules governing the tax deferral of equity grants. This Notice was released to provide a guidance so that employers can be confident on how to comply with the new options under Section 83(i) of the tax code. The newly issued guidance is now open for comments, and there will be further guidance provided at an unspecified future date.
While the notice clarifies certain matters, and offers workable solutions for some of the concerns employers had with 83(i), the Section remains complex.
At MBAF we will be carefully monitoring the future of these regulations. In the meantime, our experts are familiar with all of the intricacies of the Notice, and can help you remain in compliance, while still being able to use qualified equity grants to your greatest advantage.
Compliance with and understanding the changes and implications of the Tax Cuts and Jobs Act can be very complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting Specialists, or call us at 1-800-239-1474.