Property for Services Part 2: Succession Planning and Stock Options

Property for Services Part 2: Succession Planning and Stock Options - Elevate CPA Group

Property for Services Series: Part 2 of 5

When does property become taxable? As we discussed in Property for Services Part 1, when a service provider receives property in exchange for services, for example, equity in a company, that receipt of property is taxable to the employee and deductible for the employer. In Part 2, we will examine how Elevate CPA Group can assist you with your succession planning and stock options property taxes.

The most important and common scenario we encounter is succession planning for our RIA clients and advising employees on receipt of stock or options from their employer.

In most scenarios, when an employee receives options whether Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQSOs/NSOs) it is not a taxable event under IRS Section 83. The taxable event occurs when the option is exercised.

Some employees receive equity in a company instead of options. The timing of the taxability of this transaction is dependent on when the securities are transferable or are not subject to a substantial risk of forfeiture.

Transferable is not a practical consideration, but a technical one. A security is deemed transferrable if the employee is not subject to a substantial risk of forfeiture. A security may be subject to a buy/sell agreement, a right of first refusal, or a limited market, but none of these are transferability issues. The simple question is if the security is transferred, can the buyer (transferee) have the stock taken away due to a substantial risk of forfeiture.

The most common substantial risk of forfeiture is vesting. The general rule on taxation is the value of the property is determined on the date the substantial risk of forfeiture lapses, or as the employee meets the service requirements. For example, if an employee receives 100 shares of employer stock that vests 50% each year, 50 shares are taxable on the one-year anniversary of the grant and 50 shares are taxable on the second anniversary of the grant.

An 83(b) election simply changes the timing of the income recognition. The 83(b) election accelerates the timing of the taxation to the date of grant ignoring the vesting schedule or other substantial risk of forfeiture. I will discuss some of the considerations on whether to make the elections in the next blog. The most important takeaway to understand is an 83(b) election has very strict timing rules as it MUST be made no later than 30 days after the date of grant. The 83(b) election also has strict requirements on information it must include and where it must be sent. The specific rules are outside the scope of this blog, but we encourage you to urge your client to carefully and timely complete the 83(b) election if so required.

If you would like help explaining the tax liabilities to your client, let us know. Elevate CPA Group focuses solely on the RIA community. We pride ourselves on helping RIA clients streamline and increase the value of their business by not only providing a full range of services including fractional CFO, but also having the expertise to help you bring sophisticated tax planning to your best client relationships. If you have questions about property for services taxation, give us a call.