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Equity Compensation 101
By Gary T. Moyer, April 11, 2000
General Exceptions to Tax Rule
- The employee can make a "§83(b) election" on "day one" and recognize income equal to the bargain element (if any) of property received even though that property is subject to a substantial risk of forfeiture. Benefit to employee: when the property does vest, employee has no further income so the appreciation is not then subject to tax. Risk to employee: if property is forfeited, the employee recognized income on day one and gets no deduction at time of forfeiture
- The mere grant of an option to purchase stock does not cause the employee to recognize taxable income (unless it is the rare situation where the option has a "readily ascertainable" market value)
- Employees use the "cash" method of accounting, so they do not have taxable income if the Company "merely" promises to pay them compensation at a later date
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