The Tax Cuts and Jobs Act of 2017 (the “TCJA”) contains a new provision that potentially offers a substantial benefit to participants in equity incentive plans. Prior to its passage, much of the incentive-compensation related discussion regarding the TCJA centered on certain proposed changes that, if passed, would have substantially curtailed the use of deferred and equity compensation arrangements. In the end, however, these provisions were not included in the final bill.
The TJCA creates a new Section 83(i) of Internal Revenue Code. This provision allows certain employees of eligible companies to delay the taxation of gains realized from certain stock options or restricted stock units (“RSUs”) for up to five years.
Prior to the enactment of the TJCA, an employee exercising a non-qualified stock option generally had to recognize ordinary income in the taxable year in which the employee exercised the option. The amount of the income was the difference between what the employee paid for the stock obtained pursuant to the option and the stock’s actual fair market value on the date of exercise. Similarly, RSUs generally were taxed on the date of vesting. At that time, an employee holding RSUs normally was required to recognize ordinary income equal to the fair market value of the underlying stock (less any amount that the employee is required to pay for such stock).
Download the full article, “Deferred Compensation and the New Tax Act” written by Logan Hinkle and Debra Mackey.