Qualifying for Tax Deferral for Private Corporation Equity Compensation

 Posted on January 15, 2019 in Taxation Law

One change ushered in by the Tax Cuts and Jobs Act of 2017 permits eligible employees of privately held corporations to postpone paying income tax on the value of qualified stock options and restricted stock units (RSUs) granted to them by their employers. Under the law, one can postpone payment of this tax for up to 5 years.

This law is meant to encourage employee stock ownership in startup or early-stage businesses. It applies to stock options that are exercised and RSUs that are settled as of or after December 31, 2017. 

The IRS has announced and clarified many requirements that affect whether a person may be eligible for tax deferral. For example, in order for a company to be eligible, at least 80% of its domestic employees must have received stock options during a single calendar year. 

In addition, the company must set up an escrow account for the stock. A company may opt out by simply not setting up an escrow account.

Exclusions Under the Law

There are groups of people that the law states cannot defer tax payment:

• Executives
• Highly compensated officers
• Those who own at least 1% of the business’ stock

There may, however, be exceptions to these general rules. In addition, certain taxes payable on the value of eligible stock cannot be deferred. These taxes include those mandated by Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA).

Contact a San Jose, CA Tax Lawyer Today

If you are concerned that you may not be taking advantage of all tax benefits you are entitled to under law, speaking to a tax lawyer can help. Our firm helps businesses and individuals develop a tax strategy that complies with the law and that gives our clients every benefit that the law provides in their unique circumstances.

U.S. tax laws have been significantly altered by the Tax Cuts and Jobs Act of 2017, and it is likely that your taxes will change. As is the case with the tax deferral for private corporation equity compensation awards, you, the taxpayer, must be aware of the tax benefit in order to make use of it. Failing to evaluate your finances in light of tax laws can be a costly mistake.

The San Jose, CA tax attorney at the John D. Teter Law Offices stays current with all tax laws and is ready to help you. Call our offices today at 408-866-1810.

Sources:

https://www.irs.gov/pub/irs-drop/n-18-97.pdf