Marcum 2021 Year-End Tax Guide

OTHER TYPES OF EQUITY-BASED COMPENSATION Restricted Stock Awards

RSUs are not considered property for purposes of Section 83 since no actual property has been transferred, and therefore, an IRC Section 83(b) election cannot be made with respect to the grant of a RSU, but a Section 83(i) election is allowed. TIMING OF DEDUCTION TO EMPLOYER CORPORATION As previously discussed, a corporation would need to report any income that is required to be recognized by the employee or service provider. If the corporation issues the appropriate forms, properly completed, the recipient is deemed to have reported the income. Issues arise when the reporting forms are not provided by the corporation to the recipient and there is no evidence that the recipient included the items in gross income. In these situations, the corporation generally is not able to claim a compensation deduction. Many corporations may fail to issue and file the proper forms reporting the compensation income to employees and/or independent contractors. Since current tax rules and case law support the position that a compensation deduction may be claimed by a corporation only in the year in which the compensation income is includible in the gross income of the service provider, regardless of whether the service provider reports the income to the IRS, it is important that the proper required reporting is made by the corporation to support any tax deduction associated with equity-based compensation.

An RSA is a grant of company stock in which the grant holder’s rights in the stock are restricted until the shares vest (or lapse in restrictions). Once the vesting requirements are met, the holder owns the shares outright and may treat them as any other share of stock in the employee’s account. Vesting periods for RSAs may be time-based (a stated period from the grant date) or performance-based (often tied to the achievement of corporate goals). Upon granting of RSAs to employees or service providers, there is no tax unless the shares are vested at grant or the employee elects under Section 83(b) to be taxed at grant. Once vested, the fair market value of the vested shares, over the amount paid for the restricted stock, is compensation income to the holder (unless a Section 83(b) election was made at grant) and a deductible expense to the company. Generally, the amount paid for the restricted stock is $0. Federal income tax withholding and proper reporting by the corporation on Form W-2 or Form 1099 are required. Restricted Stock Units An RSU is a form of compensation issued by an employer to an employee in the form of company shares subject to a vesting plan and distribution schedule, after reaching certain performance goals or working for a particular length of time. The units are restricted because they are subject to a vesting schedule. Shares of the stock are issued after the vesting date. Restricted stock units are taxed as ordinary income to a service provider upon vesting. The employer corporation is entitled to a deduction for the year in which the income is includible in the income of the service provider. Federal tax withholding and proper reporting by the corporation on Form W-2 or Form 1099 are required, where appropriate.

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