Tax Implications of the Five Types of Equity Compensation, Part 1: Restricted Stock Grants
This is the first entry in a five-part blog series on the tax implications of the five types of equity compensation. Throughout the the series, we will discuss the tax implications of each of the five types of equity compensation, as described in my previous blog published 11/29/2011 (“Five Types of Equity Awards”).
Part One:
We will begin part one by focusing on Restricted Stock Grants. A restricted stock grant is stock that a company issues to an employee and is restricted (not vested) until the employee can terminate their employment without forfeiting their shares (vesting date).
The tax treatment for restricted stock can be complicated based on the type of restriction the company has placed on the shares and whether the executive elects to file the 83b election when the shares are transferred to them (future blog). In this blog we are going to assume “substantial risk of forfeiture” (described later) on the shares and the executive does not file the 83b election.
The tax implications for restricted stock mentioned above does not exist until the shares become vested. In other words there is no income to report until the year in which the shares vest. Once the stock is vested, the executive would report compensation income based on the value of the stock on the vesting date.
Usually, once the shares are transferred by the company to the executive, they become vested and are then taxable. Stock is considered vested when either of the following actions occurs:
- The shares are transferable. This occurs when the executive can transfer the shares to any other person, but only if that person accepts the shares and are not subject to “substantial risk of failure.”
“The stock is not subject to “substantial risk of failure.”
- This means that the executive will lose some or all of the value of the shares unless they continue working for the company for a specified period of time.
Dan’s Moral: As you can see, simply receiving restricted stock from your employer can be more complicated than it might appear, based on the restrictions placed on the shares and the vesting schedule.
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