Benefits, Compensation and

Retirement

Equity Arrangements
 Equity Based Incentive Plans
• Restricted Stock
• Nonqualified Stock Options (Non Qual’s)
• Incentive Stock Options (ISO’s)
• Employee Stock Purchase Plans (ESPP)
 Business Organizations
• Sole Proprietorship
• Partnership
– General
– Limited
• LLC
• Corporation
– Subchapter C
– Subchapter S
 Equity Background
• Stock
– Common
• You are the owner of the business – entitled to what?
– Profits
» If Board distributes profits in the form of dividends and all other debtors and
preferred stockholders have been paid
– Appreciation of stock on the open market
– Preferred
• Entitled to (generally) higher dividends
• Typically, the value of the preferred stock does not fluctuate with the
common stock, tends to move more with interest rates…WHY?
 Equity Background
Regulatory Matters
• Continuing Regulatory Considerations
Disclosure
Publicly Traded Companies
Privately Owned
Insiders and insider information
– Privy to non-public information
– Fiduciary obligation
 Equity Background
Regulatory Matters
• Restrictions on stock activities
Black out periods
• Reporting Responsibilities
– Internal Compliance
– SEC Compliance
 Restricted Stock
• Benefit to employee
• Risks to employee
• Taxability governed by IRC 83
Basis
Holding period - IRC 83(f)
• IRC 83(b) election
• Employer Tax Consequence
 IRC 83 Restricted Stock
• General Rules of Taxability - IRC 83(a)
• Elective Acceleration - IRC 83 (b)
 IRC 83 Operational Rules
1. Transfer of
2. Property in connection with
3. Performance of Service is taxable based on
4. FMV unless there is an
5. Enforceable
6. Substantial Risk of Forfeiture and
7. Nontransferability of the property which is
8. Nonvested.
 IRC 83 Restricted Stock
• ABC Inc. on 6/1/15 gives Employee the
right to stock (FMV $10k) for continued
employment through 6/2/16.
• This is a current ownership interest in the
stock subject to a risk of forfeiture.
Although it feels like an option it is not.
 IRC 83 Restricted Stock
• 6/1/15 Employee accepts the right to the stock
• Tax consequences for employee:
– June 2015?
– June 2016
• If FMV is $15k
• If FMV is $10k
• If FMV is $5k
 IRC 83 Restricted Stock
6/2/16 FMV Income Basis
$ 15,000 $15,000 $15,000
$ 10,000 $ 10,000 $10,000
$ 5,000 $ 5,000 $ 5,000
What is the character of the income when the restrictions lapse?
 IRC 83 Restricted Property
Assuming the Stock is Sold in 2018 for $25k
6/2/16 FMV Basis Sells for $25k
$ 15,000 $15,000 Gain = $10k
$ 10,000 $10,000 Gain = $15k
$ 5,000 $ 5,000 Gain = $20k
• What is the character of the income?
• Is any long-term capital gain?
• Is any income ordinary income (i.e. - wages)?
 IRC 83 Restricted Property
Assuming the Stock is Sold in 2018 for $1k
6/2/16 FMV Basis Sells for $1k
$ 15,000 $15,000 Loss = $14k
$ 10,000 $10,000 Loss = $9k
$ 5,000 $ 5,000 Loss = $4k
• What is the character of the loss?
• When is this recognized?
 IRC 83 (b) Election
• Election to treat as if restrictions have lapsed for
IRS purposes.
• What is the effect on taxpayer?
– For IRS purposes
– For company purposes
• Tax Consequences
• Decision factors
• Basis and Holding Period
 IRC 83(b) Election
• ABC Inc. on 6/1/15 gives Employee the right to
company stock (FMV $10k) (Restricted Stock Award)
• Ownership is contingent on continued employment
through 6/2/16.
• Employee makes an 83(b) election
• What is the effect to the employee?
• What is the effect to the employer?
• What are some benefits?
• What are some risks?
• Compare RSUs & RSAs and how 83(b) works…
 IRC 83(b) Election
• ABC Inc. on 6/1/15 gives Employee the right to
company stock (FMV $10k).

• What if employee leaves or is fired before June ’16?

• What if the employee stays, company goes public and
she sells the stock in 2018 for $100k?
 IRC 83(b) Election
• ABC Inc. on 6/1/15 gives Employee the right to
company stock (FMV $10k).

• Employee stays, company goes public and he sells the

stock in 2017 for $100k?

• Ordinary Income for difference between FMV on date

given ($10k) and purchase price ($0k) = $10,000 wages

• Long-term capital gain for difference between sales

price ($100k) and cost basis ($10k) = $90k long-term
gain
 Stock Options
• Right to Purchase Stock
– At a specified price (exercise price)
– For a certain period of time (usually 10 years)
• Terms to Understand
– Grant date – date the option is given to recipient
– Exercise Price – price recipient can purchase the stock
over the term of the option
– Option Term – period of time (usually 10 years from
grant) before the option expires
– Type of Option – Non-qualified (NQ) or Incentive (ISO)
– Vesting – when options become exercisable
 Non Qualified Stock Options
• No statutory restrictions for holding periods
or option price (compare to ISO)
• Taxation covered by IRC 83
– Grant generally not taxable
– Exercise
Bargain element = Compensation
Basis
Holding Period
 Non Qualified Stock Options
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15.
Exercise 6/7/16 (FMV$22).
Sells 6/8/17 @ $25 /sh. – what are issues on:
• Receipt
• Exercise
• Sale
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15.
Exercise 6/7/16 (FMV$22).
Sells 6/8/17 @ $25 /sh. – what are issues on:
• Receipt - No Tax
• Exercise
• Sale
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15.
Exercise 6/7/16 (FMV$22).
Sells 6/8/17 @ $25 /sh. – what are issues on:
• Receipt - No Tax
• Exercise - $7 Comp Income, Basis $22
• Sale
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15.
Exercise 6/7/16 (FMV$22).
Sells 6/8/17 @ $25 /sh. – what are issues on:
• Receipt - No Tax
• Exercise - $7 Comp Income, Basis $22
• Sale - $3 LTCG
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15.
Exercise 6/7/16 (FMV$22).
Sells 6/8/17 @ $20 /sh. – what are issues on:
• Receipt
• Exercise
• Sale
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15.
Exercise 6/7/16 (FMV$22).
Sells 6/8/17 @ $20 /sh. – what are issues on:
• Receipt - No Tax
• Exercise
• Sale
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15.
Exercise 6/7/16 (FMV$22).
Sells 6/8/17 @ $20 /sh. – what are issues on:
• Receipt - No Tax
• Exercise - $7 Comp Income, Basis $22
• Sale
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15.
Exercise 6/7/16 (FMV$22).
Sells 6/8/17 @ $20 /sh. – what are issues on:
• Receipt - No Tax
• Exercise - $7 Comp Income, Basis $22
• Sale - $2 LTCL
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15.
Exercise 6/7/16 (FMV$22).
Sells 5/8/17 $25
• Receipt
• Exercise
• Sale
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15
Exercise 6/7/16 (FMV$22)
Sells 5/8/17 $25
• Receipt - No Tax
• Exercise - $7 Comp Income, Basis $22
• Sale - $3 STCG
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15.
Exercise 6/7/16 (FMV$22).
Sells 5/8/17 @ $20
• Receipt
• Exercise
• Sale
 Non Qual’s
X receives NQ for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16 at $15
Exercise 6/7/16 (FMV$22)
Sells 5/8/17 $20
• Receipt - No Tax
• Exercise - $7 Comp Income, Basis $22
• Sale - $2 STCL
 ISO’s
• General Description
– Exercise Price = FMV at Grant Date
– Capital Gain Tax Advantaged
– $100,000 limit
• Employee Tax Consequences
Grant
Exercise – AMT (alternative minimum tax)
Stock Disposition - Regular Tax and AMT
Disqualifying Disposition
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16
Exercise 6/7/16 (FMV$22)
Sells 6/8/17 $25
• Receipt
• Exercise
• Sale
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16
Exercise 6/7/16 (FMV$22)
Sells 6/8/17 $25
• Receipt - No Tax
• Exercise
• Sale
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16
Exercise 6/7/16 (FMV$22)
Sells 6/8/17 $25
• Receipt - No Tax
• Exercise - $7 AMT Adjustment, AMT Basis $22
• Sale
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16
Exercise 6/7/16 (FMV$22)
Sells 6/8/17 $25
• Receipt - No Tax
• Exercise - $7 AMT Adjustment, AMT Basis $22
• Sale - $10 LTCG
$ 3 AMT Gain
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16.
Exercise 6/7/16 (FMV$22)
Sells 6/8/17 $10.
• Receipt
• Exercise
• Sale
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16.
Exercise 6/7/16 (FMV$22)
Sells 6/8/17 $10.
• Receipt - No Tax
• Exercise - $7 AMT Adjustment, AMT Basis $22
• Sale
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16.
Exercise 6/7/16 (FMV$22)
Sells 6/8/17 $10.
• Receipt - No Tax
• Exercise - $7 AMT Adjustment, AMT Basis $22
• Sale - $5 LTCL
$12 AMT Loss
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16.
Exercise 6/7/16 (FMV$22)
Sells 2/1/17 $25.
• Receipt
• Exercise
• Sale
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16.
Exercise 6/7/16 (FMV$22)
Sells 2/1/17 $25. Disqualifying Disposition
• Receipt - No Tax
• Exercise - $7 AMT Adjustment, AMT Basis $22
• Sale - $ 7 Comp and $3 STCG
$ 3 AMT Gain
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16.
Exercise 6/7/16 (FMV$22)
Sells 2/1/17 $20
• Receipt
• Exercise
• Sale
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16.
Exercise 6/7/16 (FMV$22)
Sells 2/1/17 $20. Disqualifying Disposition
• Receipt - No Tax
• Exercise - $7 AMT Adjustment, AMT Basis $22
• Sale - $ 5 Comp
$ 2 AMT Loss
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16.
Exercise 6/7/16 (FMV$22)
Sells 6/1/17 $10.
• Receipt
• Exercise
• Sale
 ISO’s
X receives ISO for 1,000 shares (FMV $15)
on 6/6/15. Exercisable after 6/6/16.
Exercise 6/7/16 (FMV$22)
Sells 6/1/17 $10. Disqualifying Disposition
• Receipt - No Tax
• Exercise - $7 AMT Adjustment, AMT Basis $22
• Sale - $ 5 STCL
$12 AMT Loss
 ESPP
Employee Stock Purchase Plan

• IRC 423 Option Plan

– 15% Bargain Element
• Taxable Event on sale of stock
Holding Period
Character of Gain
 ESPP
Y Corp. has an ESPP – Plan Year Ends 12/31/2015
Grants all eligible employees the right to purchase
stock on 12/31/15 at a 15% discount on lower of
beginning or ending value of the period.
FMV on 1/1/15 $100
FMV on 12/31/15 $200
X purchases 1 share – what is the purchase price?
 ESPP

X purchases 1 share
Lower price = $100
Less 15% discount = $15
Purchase Price = $85
 ESPP
Sale of 1 share @ $300/share

What is the result if the sale is Qualifying vs

Disqualifying?

Sale Date = 12/10/16 – Disqualifying Disposition

Sale Date = 1/10/17 - Qualifying Disposition

Is there a different result if no discount?

 ESPP
Qualifying Sale
Sales Price $ 300
Basis 85
Total Income $ 215
Character of Income
1/10/17 $ 15 Compensation*
$200 LTCG (remainder of $215)

*If there was no 15% discount this goes away.

 ESPP
Disqualifying Sale
Sales Price $ 300
Basis 85
Total Income $ 215
Character of Income
12/10/16 $115 Compensation*
$100 Short-term Capital Gain (remainder of $215)
$200 FMV on Date Stock was received
- 85 Purchase Price
$115 Compensation Income