Tax Implications of the Five Types of Equity Compensation, Part 3: Stock Appreciation Rights (SARs)
In this five part series we have covered the tax implications of Restricted Stock Grants and Restricted Stock Units. In part three, we will be discussing the tax implications of Stock Appreciation Rights (SAR).
What are Stock Appreciation Rights:
Stock Appreciation Rights (SAR’s) provide the executive with the right to receive cash in the amount of increase in value of a specified number of shares. The following are some common questions and answers about SAR’s that should help define and differentiate them.
How are SAR’s similar to options:
SAR’s are similar to options in that the executive determines when to exercise the shares.
How do SAR’s differ from options:
Unlike an option, the SAR does not require the executive to come up with the cash at the time of exercise. By simply exercising the SAR, the executive receives cash.
Note: However, sometimes companies may grant SAR’s that pay off in shares of the company stock. By paying off in stock, the company does not need to come up with the cash.
This brings us to the main objective — Taxes:
- SAR’s are taxed the same as non qualified stock options.
- When the executive is granted the SAR or when it becomes exercisable, there are no tax implications.
- At the time of exercise, the executive reports ordinary income on the amount of cash received.
- If the executive receives shares, they will report income equal to the value of the shares the day they are transferred.
Dan’s Moral: SAR’s provide the executive a way to participate in the appreciation of their company stock without having to come up with money out of their own pocket at the time the SAR is granted, as well as when they are exercised.
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