With all of the political disagreement on the recently passed tax legislation, some of the subtle changes within the bill have not been significantly discussed. As part of the “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for the fiscal year 2018” bill, a certain provision affects employees at non-publicly traded companies who have incentive stock options.
Historically, it was very difficult to exercise an ISO if the company value had increased since the options were granted, due to the AMT income add-back and the lack of correlated liquidity. This has been a real problem for younger employees who do not have the liquidity or access to liquidity that the higher compensated employees may have. This is truly beneficial to the employees on the below the executive level.
The beauty of the Bill is that it allows for the “option” to elect for a 5-year deferral of taxes, as opposed to making it mandatory, so if someone prefers to pay the tax in the year of exercise, they can.
Simply put, certain employees who receive incentive stock options as compensation for the performance of services and later exercise such options would be permitted to elect to defer the recognition of income for up to 5 years, IF the corporation’s stock is not publically traded.
For planning purposes, this provides even more opportunity as the AMT limit has been increased AND the taxes can be deferred, giving employees maximum flexibility around the right strategy.
We will continue to monitor this and provide more detailed insights. Additionally, for those of you who have previously exercised options and PAID a lot of AMT, it is time to strategize on the refund of those amounts over the next few years – as the Bill also allows for a refund of 50% of the carryovers over 4 years.
If your looking for some advice, contact us today and we can talk!