Equity Compensation Vehicles

Transcription

1 Equity Compensation Vehicles April 2014

2 INCENTIVE STOCK OPTIONS (ISOS) Grant Exercise Sale Incentive Stock Options Grant of incentive stock options to purchase stock at some later date (subject to certain date restrictions) for FMV as of grant date. Exercise for cash, shares, or promissory notes. Must satisfy requirements of 422. ISOs can only be granted to employees. Financial statement expense is recognized over the vesting period for time vested ISOs. No taxable income. No regular taxable income. However, the spread is an AMT adjustment. Capital gain on difference between amount realized and exercise price that the shares are held for 2 years from grant and 1 year from exercise. Failure to satisfy either requirement results in a disqualifying disposition. Tax deduction if a disqualifying dispositions, and if reported on Form W-2 (however, see Robinson v. United States, 335 F.3d 1365 (Fed. Cir. 2003), cert. denied, which held that proper reporting by the employer is not required in order to claim deduction). Report as capital gain on Schedule D of the employee s federal income tax return. The spread (at time of exercise) in a disqualifying disposition is ordinary income included on the W-2 in the taxable year in which the disqualifying distribution occurred (limited to actual gain on disposition). Any remaining gain is short or long-term capital gain. Complete and furnish Form 3921 to employee by 1/31 and to IRS by 2/28 (for paper filings) or 3/31 (for electronic filings) of the year following the exercise. Report disqualifying disposition on W-2 if information is available. Income and employment tax withholding is not required. When to exercise (may result in state/local tax.) Financing the exercise price Financing the tax liability (AMT) Non-transferability to family members or upon divorce $100,000 annual individual limitation AMT credit Exercise of unvested options ( 83(b) election for AMT) Cashless exercise provisions Pyramiding provisions Reload feature Golden Parachute payments ( 280G) if accelerated vesting Vested options/restricted shares/ 83(b) ISO requirements Material modifications Special 10% shareholder rule Form

3 NONQUALIFIED STOCK OPTIONS (NQSOS) Grant Exercise Sale Withholding (for employees) NONQUALIFIED STOCK OPTIONS Grant of options to purchase stock at some later date for FMV (or above) as of grant date. Exercise for cash, common shares, or promissory notes. Discounted exercise price may be deferred compensation under 409A. For purposes of the. The term spread means the difference between the FMV at the time of exercise and the amount paid. Financial statement expense is recognized over the vesting period for time vested NQSOs. No taxable income. (However, discounted options may be considered deferred compensation under 409A). The spread is ordinary income subject to income and employment tax withholding. Tax deduction equal to spread if employer reports on Form W-2 (even if employer does not withhold). Capital gain/loss on the appreciation from date of exercise. The holding period begins on the date of exercise. For Federal purposes, withhold taxes by including with regular wages or treating as supplemental payment (25%). FICA is also required. If aggregate supplemental wages exceed $1,000,000, then must withhold at highest statutory rate. State/local withholding may also apply. See above. Ordinary income included in W-2 or 1099-MISC (for independent contactors). Capital gain reported on Schedule D of employee s federal income tax return. Deposit payroll taxes and report accordingly. Also include on W-2 or MISC. When to exercise (may result in state/local tax.) Financing the exercise price Financing withholding Transferability to family members) Transferability upon divorce Exercise of unvested options ( 83(b)). Cashless exercise provisions Pyramiding provisions Reload feature Golden Parachute payments ( 280G) if accelerated vesting 3

4 STOCK APPRECIATION RIGHTS (SARS) Grant Exercise Sale Withholding (for employees) STOCK APPRECIATION RIGHTS Similar to NQSOs; however, the participant receives only the spread value (difference between fair market value at exercise and grant price ) at exercise in cash or shares. No actual exercise price is paid. Discounted grant price may be deferred compensation under 409A. Financial statement expense is recognized over the vesting period for time vested SARs. No taxable income. (However, discounted SARs may be considered deferred compensation under 409A). The spread is ordinary income subject to income and employment tax withholding. Tax deduction equal to spread if employer reports on Form W-2 (even if employer does not withhold). Capital gain/loss on the appreciation from date of exercise. The holding period begins on the date of exercise. For Federal purposes, withhold taxes by including with regular wages or treating as supplemental payment (25%). FICA is also required. If aggregate supplemental wages exceed $1,000,000, then must withhold at highest statutory rate. State/local withholding may also apply. See above. Ordinary income included in W-2 or 1099-MISC (for independent contactors). Capital gain reported on Schedule D of employee s federal income tax return. Deposit payroll taxes and report accordingly. Also include on W-2 or MISC. When to exercise (may result in state/local tax.) Financing withholding Transferability to family members) Transferability upon divorce Exercise of unvested SARs ( 83(b)). Cashless exercise provisions Pyramiding provisions Reload feature Golden Parachute payments ( 280G) if accelerated vesting 4

5 Restricted Stock Awards (RSAs) Grant Forfeiture Vesting Sale Withholding (for employees) Restricted Stock Awards A grant by an employer of shares of company stock that is subject to certain restrictions until the shares vest. Vesting usually happens over a graded schedule that lasts multiple years as the employee meets certain vesting requirements (i.e., service or performance requirements). Financial statement expense is recognized over the vesting period for time vested RSAs. Generally, no current taxation. However, employee can make election under Internal Revenue Code (IRC) section 83(b) to recognize as ordinary income the fair market value of the shares as of the grant date. No tax deduction. Unless section 83(b) election is made. If election is made, employer takes deduction equal to the amount includable in employee's income. No taxable income. If section 83(b) election was made the employee cannot recover taxes previously paid. If a deduction was previously taken (e.g., upon an 83(b) election), the amount of deduction must be included in gross income in the year of forfeiture. Ordinary income equal to the fair market value of currently vesting shares less the amount paid, if any. If section 83(b) election was previously made, no taxable income. Tax deduction on the amount includable in employee s income for each taxable year shares vest. Taxable year of deduction may differ for fiscal year taxpayers. Capital gain/loss on the difference between the amount realized and taxpayer s basis (the amount previously included in income plus the amount paid, if any). The holding period begins at the vesting date or, if IRC section 83(b) election was made, at the grant date. For Federal purposes, withhold taxes by including with regular wages or treating as supplemental payment (25%). FICA is also required. If supplemental wages exceed $1,000,000, then must withhold at highest statutory rate. State/local withholding may also apply. See above. Ordinary income included in W-2 or 1099-MISC (for independent contactors). Capital gain reported on Schedule D of employee s federal income tax return. Deposit payroll taxes and report accordingly. Also include on W-2 or 1099-MISC. Financing withholding Monetization of shares if private company Dividend rights Golden Parachute payments ( 280G) if accelerated vesting Performance vesting 5

6 Restricted Stock Units (RSUs) Grant Vesting/ Distribution Sale Withholding (for employees) Restricted Stock Units A grant valued in terms of the employer stock. Unlike an RSA, no stock is actually issued at the time of grant. Instead, as the employee satisfies certain vesting requirements, the employer distributes a set value either in stock, cash or a combination of both with any stock being distributed free of restriction. Vesting usually happens over a graded schedule that lasts multiple years as the employee meets certain vesting requirements (i.e., service or performance requirements). Distribution can occur at a point in time after vesting (may be subject to 409A). Financial statement expense is recognized over the vesting period for time vested RSAs. No taxable income and no ability to file an Internal Revenue Code (IRC) section 83(b) election. FICA due on fair market value of units upon vesting. Ordinary income equal to the fair market value of units when distributed. Tax deduction on the amount includable in employee s income for each taxable year employee recognizes income. Taxable year of deduction may differ for fiscal year taxpayers. Capital gain/loss on the difference between the amount realized and taxpayer s basis (the amount previously included in income). The holding period begins at the distribution date. For Federal purposes, withhold taxes by including with regular wages or treating as supplemental payment (25%). FICA is also required (at vesting). If supplemental wages exceed $1,000,000, then must withhold at highest statutory rate. State/local withholding may also apply. See above. Ordinary income included in W-2 or 1099-MISC (for independent contactors). Capital gain reported on Schedule D of employee s federal income tax return. Deposit payroll taxes and report accordingly. Also include on W-2 or 1099-MISC. Whether to defer receipt of shares/cash, which defers tax liability. Remember that there are FICA taxes due even if receipt and income tax is deferred. Financing withholding Monetization of shares if private company Dividend rights 409A compliance Golden Parachute payments ( 280G) if accelerated vesting Performance vesting Timing of distributions 409A compliance 6

7 Comparison of Equity Vehicles ISO/NQSO SAR Restricted Stock RSU Enhances Retention Upside (wealth accumulation) Potential Encourages Actual Stock Ownership Ability to Control Taxable Event Ease of Acquiring Benefit (Does not require employee investment) Opportunity for Capital Gains Taxation Minimizes Dilution Highly Effective Partially Effective Not Effective 7

8 IRS CIRCULAR 230 NOTICE: To comply with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained herein (including any attachments), unless specifically stated otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending any transaction or matter addressed herein to another party. 8

9 CONTACT INFORMATION Richard V. Smith Managing Director ExeComp Solutions LLC 7150 E. Camelback Rd Scottsdale, AZ (480) David Chang Managing Director ExeComp Solutions LLC 51 JFK Parkway, First Floor West Short Hills, NJ (973)