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9/23/16

Passed in House: Empowering Employees through Stock Ownership Act

Below is the text for a new piece of legislation that will be of interest to any professional that works for a startup which offers stock options in lieu of salary/wages in the early years of the business. Currently, any stock options that are granted that the recipient does not pay for are taxed as income based on fair market value. Some stock option programs involve restricted shares (RSUs) which force the taxpayer to make an election between recognizing income as the value changes and capital gains treatment without the assurance of staying with the firm through a vesting period.
The bill allows the recipient to defer the tax until one of five events occur that are outlined below. A recipient can choose to just recognize it as income up receipt if they wish, but in startups, that is a risky move if the company folds or the value of the shares deteriorates.
You can track the bill (HR 5719) at this URL https://www.congress.gov/bill/114th-congress/house-bill/5719

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This bill amends the Internal Revenue Code to allow an employee to elect to defer, for income tax purposes, income attributable to certain stock transferred to the employee by an employer.
The employee may defer the inclusion of income from the stock until the year that includes the earliest of the dates on which:

  • the stock is sold, exchanged, or otherwise transferred;
  • the employee becomes an excluded employee;
  • stock of the corporation becomes readily tradeable on an established securities market;
  • seven years have passed after the rights of the employee in the stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier; or
  • the employee elects to include the amount in income.

The stock must meet specified requirements and be transferred to the employee from an eligible corporation in connection with the performance of services as an employee.
A corporation is eligible if: (1) no stock of the corporation is readily tradeable on an established securities market during the year or any preceding year, and (2) it has a written plan under which at least 80% of all employees have the same rights and privileges to receive stock for the year.
Employees are excluded if they are or have been: (1) a 1% owner, the chief executive officer, or the chief financial officer of the corporation; (2) a family member of the specified individuals; (3) or one of the four highest compensated officers of the corporation.
The corporation transferring stock must notify employees regarding the option of deferring income and meet specified withholding and reporting requirements.
 

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