WASHING TON: The tax cuts and Jobs Act of 2017 (PL 115-97) added new Section 83(i) to the US Internal Revenue Code, which allows eligible employees of private companies the opportunity to defer US federal income taxation on eligible stock options and restricted stock units (RSUs) for up to five years following exercise of the stock options or settlement of the RSUs. The deferral treatment applies to a stock option that is exercised and RSUs that are settled after December 31, 2017.
Under current tax law, a nonqualified stock option is generally taxed upon exercise of the stock option and RSUs are generally taxed upon settlement of the RSUs. Stock of a private company cannot be readily sold by employees to cover taxes. At the end of the deferral period, the amount of income that must be recognized (and subject to withholding) is based on the value of the stock at the time of exercise of the stock option or the settlement of the RSUs, even if the stock has declined in value during the deferral period. It may be difficult for the company to collect the withholding taxes from the employee (or former employee) at the end of the deferral period, even though the employee (or former employee) would have been required to agree to pay the withholding. It is also not clear how the company’s withholding and reporting obligations would apply for year-end exercises or settlements where the election could be made in a subsequent year. The deferral does not apply to FICA or FUTA taxes.
