The impact of the Tax Cuts and Jobs Act on stock compensation continues to be a focus here at the NASPP. My understanding is that the bill is supposed to come out of committee in the House possibly as early as today and that we might also see the Senate version of the bill today.
Here are a few updates based on what we know so far.
ISOs and ESPPs Exempt
The Joint Committee on Taxation (JCT) report on the bill clarifies that ISOs and ESPPs are intended to be exempt from the definition of NQDC. That’s good news for those of you who, like myself, are big fans of qualified ESPPs. It also could mean that I wasn’t completely off base on Monday when I suggested this bill might lead to a resurgence of ISOs.
At-the-Money Options NOT Exempt
I know some folks were holding out hope that the failure to exclude at-the-money options from the definition of NQDC was a drafting error but that doesn’t appear to be the case. The JCT report says:
The proposal applies to all stock options and SARs (and similar arrangements involving noncorporate entities), regardless of how the exercise price compares to the value of the related stock on the date the option or SAR is granted. It is intended that no exceptions are to be provided in regulations or other administrative guidance.
So that seems pretty clear. Sounds like someone was annoyed about the exception included in the 409A regs for at-the-money options.
Performance Conditions Don’t Count
An oddity in the proposed legislation is that vesting tied to performance conditions doesn’t count as a substantial risk for forfeiture. For public companies, I think most performance awards are tied to both a service and a performance condition, so this might not be a significant concern (although it probably will be necessary to make sure the service condition extends through the date that the comp committee certifies performance, otherwise the awards would be taxable before performance has been certified). But it’s going to be a significant problem for private companies that want to make vesting in awards contingent on an IPO or CIC.
Retirement Provisions Will be a Problem
The requirement to tax NQSOs and RSUs upon vest will also put a wrinkle in retirement provisions. As you all know, when grants provide for accelerated or continued vesting upon retirement, there’s no longer a substantial risk of forfeiture once an employee is eligible to retire. Thus, under the tax bill, both NQSOs and RSUs that provide for payment upon retirement would be fully taxable for both FIT and FICA purposes when employees are eligible to retire (and restricted stock paid out at retirement is already fully taxable upon retirement eligibility).
Relief for Private Companies
The bill has been amended to include a provision that would allow employees in private companies to make an election upon exercise of stock options or vesting of RSUs that would defer taxation for five years (in the case of stock options, it’s not entirely clear when the five-year period would start). This is nice, but I’m not sure it’s enough. How many private companies are on a five-year trajectory to IPO or can accurately predict when they are five years out from IPO?
Tags: tax reform
Here we are again at the start of another season of Section 6039 filings. Nothing much has changed with respect to Section 6039 filings in recent years, so imagine my surprise when I learned that the IRS had updated Form 3922.
Form 3922 Grows Up
As it turns out, the only update to the form is that it has been turned into a fill-in form. If you are planning on submitting paper filings, this allows the form to be filled in using Adobe Acrobat, so you don’t have to scare up a typewriter or practice your handwriting. I haven’t owned a typewriter since college and even I can’t read my handwriting, so I am a big fan of fill-in forms.
Unfortunately, this is just about the least helpful improvement to the forms that the IRS could make. Form 3922 is for ESPP transactions. ESPPs tend to be offered by publicly held companies with well over 250 employees. Chance are, if a company has to file Form 3922, the company has more than 250 returns to file (less than 250 ESPP participants is probably a pretty dismal participation rate for most ESPP sponsors) and the returns have to be filed electronically. The fill-in feature doesn’t impact the electronic filing procedures; it is only helpful for paper filings.
It would have been more helpful if the IRS had made Form 3921 a fill-in form. Given the declining interest in ISOs (only around 10% of respondents to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey grant ISOs), companies are more likely to be filing this form on paper. The IRS notes, however, that it selected Form 3922 to be made into a fill-in form because they receive so few filings of it on paper. I guess the IRS’s goal was to appear helpful but not actually be helpful. Your tax dollars at work.
A Fill-In Form Isn’t As Helpful As You Think, Anyway
As it turns out, having a fill-in form may not be that helpful, anyway. I was thinking you could fill in the form, save it, and then email it to the IRS but it doesn’t seem like this is the case. No, even if you fill it in using Adobe Acrobat, you still have to print it out and mail it to the IRS. And the requirements for printing the form out still include phrases like “optical character recognition A font,” “non-reflective carbon-based ink,” and “principally bleached chemical wood pulp.” I think this means that you have to print the form on white paper, using black ink that isn’t too shiny, and using the standard fonts in the fill-in form. But I’m not entirely sure.
What About Form 3921?
When I first saw that Form 3922 is now fill-in-able, I assumed, perhaps naively, that a fill-in Form 3921, which would truly be useful, would be available any day. But that was back in September and still no update to Form 3921. Upon reflection, especially given the IRS’s statement about why this honor was bestowed upon Form 3922, I think I may have been overly optimistic.
More Information about Section 6039 Filings
For more information on Section 6039 Filings, check out the NASPP Alert “Reminder: ISO and ESPP Information Returns and Statements.”
Thanks to Diana Woods of Fenwick & West for bringing the updated form to my attention.
Tags: Employee Stock Purchase Plan, ESPP, Form 3921, Form 3922, incentive stock option, ISO, Section 6039
Leap year can make things complicated. For example, if you use a daily accrual rate for some purpose related to stock compensation, such as calculating a pro-rata payout, a tax allocation for a mobile employee, or expense accruals, you have to remember to add a day to your calculation once every four years. Personally, I think it would be easier if we handled leap year the same way we handle the transition from Daylight Saving Time to Standard Time: everyone just set their calendar back 24 hours. Rather than doing this on the last day of February, I think it would be best to do it on the last Sunday in February, so that the “fall back” always occurs on a weekend.
In a slightly belated celebration of Leap Day, I have a few tidbits related to leap years and tax holding periods.
If a holding period for tax purposes spans February 29, this adds an extra day to the holding period. For example, if a taxpayer buys stock on January 15, 2015, the stock must be held for 365 days, through January 15, 2016 for the sale to qualify for long-term capital gains treatment. But if stock is purchased a year later, on January 15, 2016, the stock has to be held for 366 days, until January 15, 2017, to qualify for long-term capital gains treatment. The same concept applies in the case of the statutory ISO and ESPP holding periods–see my blog entry “Leap Year and ISOs,” (June 23, 2009).
Even trickier, if stock is purchased on February 28 of the year prior to a leap year, it still has to be held until March 1 of the following year for the sale to qualify for capital gains treatment. This is because the IRS treats the holding period as starting on the day after the purchase. Stock purchased on February 28 in a non-leap year has a holding period that starts on March 1, which means that even with the extra day in February in the year after the purchase, the stock still has to be held until March 1. See the Fairmark Press article, “Capital Gains and Leap Year,” February 26, 2008.
Ditto if stock is purchased on either February 28 or February 29 of a leap year. In the case of stock purchased on February 28, the holding period will start on February 29. But there won’t be a February 29 in the following year, so the taxpayer will have to hold the stock until March 1. And if stock is purchased on February 29, the holding period starts on March 1. Interesting how none of these rules seem to work in the taxpayer’s favor.
The moral of the story: if long-term capital gains treatment is important to you, it’s not a bad idea to give yourself an extra day just to be safe–especially if there’s a leap year involved.
Tags: capital gains, Disqualifying Disposition, Employee Stock Purchase Plan, ESPP, holding period, incentive stock option, ISO, leap year, qualifying disposition, Section 422, Section 423