Employee compensati🅘on is a major expenditure for most corporations. As a result, many companies find it easier to pay at least a portion of employee compensation in the form of stock. This type of compensation offers two main advantages: It reduces the amount of cash employers must distribute and serves as an incentive for employee productivity.

There are many types of 澳洲幸运5官方开奖结果体彩网:stock compensation, each with its own set of rules and regulations. Executives who receive 澳洲幸运5官方开奖结果体彩网:stock options face a special set of rules that restrict the circumstances under which they can exercise and sell those options. This article explores the nature of 澳洲幸运5官方开奖结果体彩网:restricted stock and 澳洲幸运5官方开奖结果体彩网:restricted stock units (RSUs) and how they are taxed.

What Is Restricted Stock?

Restricted stock is a type of stock granted to an executive that is nontransferable and subject to 澳洲幸运5官方开奖结果体彩网:forfeiture under certain conditions, such as termination of employment or failure to meet corporate or personal performance 澳洲幸运5官方开奖结果体彩网:benchmarks. Typically, restricted stock becomes available to the recipient under a graded vesting schedule that spans several years.

While there are exceptions, most restricted stock grants are made to executives who are considered to have "insider" knowledge of a corporation. As a results, these grants are subject to 澳洲幸运5官方开奖结果体彩网:insider trading regulations under 澳洲幸运5官方开奖结果体彩网:SEC Rule 144. Failure to adhere to these regulations can lead to forfeiture. Restricted stockholders have 澳洲幸运5官方开奖结果体彩网:voting rights, just like any other type of 澳洲幸运5官方开奖结果体彩网:shareholder. Restricted stock gran൩ts have become more common in the mid-2000s when companies were required to expense stock option grants.

What Are Restricted Stock Units (RSUs)?

RSUs resemble restricted stock options conceptually, but differ in some key respects. RSUs represent an 澳洲幸运5官方开奖结果体彩网:unsecured promise by the employer to grant a set number of shares of stock to the employee once the vesting schedule is completed. Some RSU plans offer the option of a cash payout instead of stock, but most plans require that the actual shares be issued—though not until ves🐻ting and forfeiture conditions are met.

RSUs differ from restricted stock in that shares cannot be delivered until vesting and forfeiture requirements are satisfied. In some cases, employees can decide when to receive their RSUs, which may be useful for 澳洲幸运5官方开奖结果体彩网:tax planning. Unlike restricted stockholders, RSU holders have no voting rights during the vesting period, as no shares have been issued yet. The rules of each plan determine whether RSU holders receive dividend equivalents.

How Is Restricted Stock Taxed?

Restricted stock and RSUs are taxed differently from 澳洲幸运5官方开奖结果体彩网:other stock options, such as statutory or non-statutory 澳洲幸运5官方开𓃲奖结果体彩网:emplo꧙yee stock purchase plans (ESPPs). Those plans generally have tax consequences at the date of exercise or sale, whereas restricted stock usually becomes taxable upon the completion of the vesting schedule. For restricted stock plans, the entire amount of the vested stock must be counted as 澳洲幸运5官方开奖结果体彩网:ordinary income in the year of vesting.

The taxable amount is determined by subtracting the the original purchase or 澳洲幸运5官方开奖结果体彩网:exercise price of the stock (which may be zero) from the 澳洲幸运5官方开奖结果体彩网:fair market value of the stock when it becomes 澳洲幸运5官方开奖结果体彩网:fully vested.  The difference is reported as ordinary income. If the stock is not sold at vesting, but later, any difference between the sale price and the fair market value at vesting is treated as a 澳洲幸运5官方开奖结果体彩网:capital gain or loss.

Section 83(b) Election

Restricted stockholders have the option to elect to report the fair market value of the shares as ordinary income at the time they are granted, rather than when they vest. This election allows for 澳洲幸运5官方开奖结果体彩网:capital gains treatment, beginning at the time of the grant, instead of vesting.

This strategy can significantly reduce ꧅taxes, as the stock price at grant is typically much lower than at vesting. The election is especially advantageous when there is a longer time frame between when shares are granted and when they vest (five years or more).

Example: Reporting Restricted Stock

Sam and Alex are both key executives in a large corporation. They each receive restricted stock grants of 10,000 shares for zero dollars. The company stock is trading at $20 per share on the grant date. Sam decides to declare the stock at vesting while Alex elects for Section 83(b) treatment. Therefore, Sam declares nothing in the year of grant while Alex must report $200,000 as 澳洲幸运5官方开奖结果体彩网:ordinary income.

Five years later, on the date the stock becomes fully vested, the stock is trading at $90 per share. Sam will have to report a whopping $900,000 of the stock balance as ordinary income⛄ in the year of vesting, while Alex rep💎orts nothing unless the shares are sold, which would then be eligible for capital gains treatment. Therefore, Alex pays a lower rate on the majority of the proceeds, while Sam must pay the highest rate possible on the entire gain realized during the vesting period.

Unfortunately, there is a substantial risk of forfeiture associated with the Section 83(b) election that goes above and beyond the standard forfeiture risks inherent in all restricted stock plans. If Alex should leave the company before the plan becomes vested, all rights to the entire stock balance could be relinquished, even though the $200,000 of stock granted had been declared as income. Alex will not be able to recover the taxes paid as a result of this election. Some plans also require the employee to pay for at least a portion of the stock at the grant date, and this amount can be reported as a 澳洲幸运5官方开奖结果体彩网:capital loss under these circumstances.

Taxation of RSUs

The taxation of RSUs is a bit simpler than for standard restricted stock plans. Because there is no actual stock issued at grant, no Section 83(b) election is permitted. This means that there is only one date in the life of the plan on which the value of the stock can be declared. The amount reported will equal the fair market value of the stock on the date of vesting, which is also the 澳洲幸运5官方开奖结果体彩网:date of delivery in this case. Therefore, the value🍒 of the stock is reported as ordinary income in the year the stock becomes vested.

The Bottom Line

Restricted stock and RSUs are two types of stock-based employee compensation with distinct tax and forfeiture rules. The tax implications of each can be complex, and this article only covers the basics. For specific advice, consult a tax professional or 澳洲幸运5官方开奖结果体彩网:financial advisor.