The NASPP Blog

This past summer, both the Senate and House of Representatives introduced legislation that seek to defer taxation on some forms of stock compensation issued by private companies. There looks to be some hope of passing at least one of the bills; in today’s blog I’ll catch you up on the topic.

The Proposals

Both the House and Senate bills closely matched in terms of what they proposed in their initial drafts. In September, the House Ways and Means Committee approved the House bill (known as HR 5719, with some proposed amendments), clearing the way for the floor of the House of Representatives to vote on their bill.

Taxes Deferred?

In an attempt to address a longstanding issue with private company stock and stock compensation (illiquidity), the proposed bills represent an opportunity for private company employees vesting in RSUs or exercising non-qualified stock options to defer taxation on those instruments for up to 7 years. Given that many companies of private companies face a hurdle of paying taxes on shares they receive but can’t sell (at exercise for an NQSO and vest for an RSU), this deferral of taxes could be very welcome news, and promote the ability for these employees to more easily exercise their stock options and acquire RSU shares. This could help to underscore the value that many private companies place upon the place of equity vehicles in their compensation programs.

The new legislation, if passed, would essentially amend Section 83 of the Internal Revenue Code to add a subsection.

Hurdles

A memo written by Compensia (“Congress Considers Legislation to Postpone Taxation of Private Company Equity Awards,” September 19, 2016) on the topic evaluates the possible outcomes for the proposals and areas to watch. In particular, of note is that as drafted, the proposals would only defer taxes on grants that were issued in a year when at least 80% of employees received a grant. Per Compensia, “In other words, if a company did not make a broad-based grant in a particular calendar year, none of the awards granted during that year will be eligible for tax deferral.” As Compensia elaborates,

“Further, the bills’ reference to all employees having the “same rights and privileges” is potentially problematic. To the extent that this language is intended to prohibit de minimis awards to some groups of employees, it may present problems for venture-backed companies.

It is also worth noting that the bills are silent on several matters that will be of importance to the granting company and the employees receiving the awards. For example, it is not clear whether the grants or awards must conform to a specific design. Most privately-held companies structure their broad-based equity grants as simple time-based awards. Presumably, these arrangements will continue to be sufficient to ensure that the underlying shares are considered “qualified stock.”

What’s Next?

The House bill, HR 5719, will now make its way to the House of Representatives for consideration. Compensia notes that “while the Senate has yet to act on its version of the bill, with the November election looming, it is possible that these bills could see a final vote before Congress adjourns at the end of the month.”

Stay tuned for developments in this area.

-Jennifer