The House passed H.R. 5719 on Thursday, September 22nd and the bill now moves to the Senate for a vote. Here are some of the highlights of the proposed legislation:
- It passed with a vote of 287-124 – primarily with Republican support. Of the 124 “nays” – 123 came from Democrats.
- It would require 80% of the workforce to be eligible to participate in a company stock plan to qualify.
- It would not apply to C-level executives, 1 of the 4 highest paid employees at any point within the past 10 years or individuals who own 1% or greater of the whole company.
The tax implications are significantly positive for the employees who qualify. Here are some of the parts we know today and some general insights:
- It would fall under IRC 83 – specifically 83(i) – (think 83(b) election!).
- It would require an election to be made by each employee who would choose to leverage the tax deferral.
- It would apply to stock options (ISOs, NSOs) and RSUs.
- No cash can be received as part of the exercise or vest.
The biggest questions regarding the bill revolve around 2 major issues: the first issue is political and the second is tax application (AMT etc.). The bill will likely pass a Republican-controlled Senate; however, only about 31% of House Democrats supported the legislation. Heavy democratic opposition to the bill is most likely derived from one of two things – simply because it is a Republican-sponsored bill OR the fact that it would reduce government revenue, which would keep that money in the pockets of the employees. This is important due to the fact that the President could throw a wrench into passing the bill.
The second issue has to do with taxation, specifically AMT and capital gains. Although not specifically addressed, there seems to be some implied treatments. These specifics will likely require further clarity either as part of the final bill or through subsequent rulings. Some questions that exist:
- If the election is made and the stock is held for a year – does capital gain treatment now apply as opposed to ordinary income? Would the deferred portion be ordinary income and future growth be long-term gain?
- Would AMT not apply to exercised ISO’s? Would it still apply, just in a deferred setting? How would AMT be addressed as part of a sale or simply after the 7-year deferral?
From our perspective, this bill is largely positive for employees who have equity at growing, private companies. As many employees know, the decision to exercise an option is often not available simply due to massive tax bills that follow – despite no cash being received. We give this bill, pending further clarification, a thumbs up.