Tax Implications of the Five Types of Equity Compensation, Part 2: Restricted Stock Units
Restricted Stock Units; Part 2 of my five-part blog series on the tax implications of the five types of equity compensation: Restricted Stock Grants, Restricted Stock Units, Stock Appreciation Rights, Non-qualified Stock Option, Incentive Stock Options
Throughout this series, we will discuss the tax implications of each of the five types of equity compensation first as described in my previous blog published 11/29/2011 (“Five Types of Equity Awards”).
In my previous blog, Part One of the series, we discussed Restricted Stock Grants, and the tax implications involved. Part Two consists of defining the second type of equity compensation; Restricted Stock Units (RSU’s), and important components including forfeiture, tax consequences, timing and more.
- Restricted Stock Units (RSU’s) are very similar to Restricted Stock Grants with one exception, the time when the shares are transferred. Restricted Stock Grants are transferred at the time of the grant even though the executive may not have direct access to the shares due to possible forfeiture based on the vesting schedule.
- In the case of RSU’s the company does not transfer shares at the time of the grant. The shares are transferred once the employee has worked long enough to meet the required time period. Fundamentally, the employee would not be entitled to any dividends until the shares are transferred. Also, due to the fact that the shares are not transferred at the time of grant, the executive cannot file a section 83b election to convert future appreciation of the shares to capital gain.
Keeping in mind that since the executive does not have access to the shares when granted, there are no tax consequences until the shares are transferred. At the time of transfer, the shares become vested and the executive will report compensation income on the entire value of the shares. This amount is the cost basis for tax purposes.
Dan’s Moral: Because the company determines the timing and restrictions placed on RSU’s, the only decision the executive needs to make is whether to hold the shares at the time of transfer or sell them.
- Please be sure to subscribe to our blog to be automatically notified as the series continues on the “Tax Implications of the Five Types of Equity Compensation, Part 3″.
For more information on Dan Langworthy and Executive Capital, LLC you can also visit our website: http://www.executivecapitalmn.com and join Dan’s network on Linkedin http://www.linkedin.com/in/danlangworthy
Securities and advisory services offered through LPL Financial, a Registered Investment Advisory, Member FINRA/SIPC