Tax forms, a mouse, and a pen

Recently, the Internal Revenue Code (IRC) has introduced Section 83(i). This new code section allows for certain private companies to begin adopting qualified equity grant plans. These plans would permit restricted stock units (RSU’s) or stock options to be issued by corporations to their employees. These options would be issued to qualifying employees in exchange for their time and services with the corporation.

Although there are certain benefits to both the companies and their employees associated with these elections, there are also several detriments, including potential financial and administrative hardships to the company and its employees.

The IRC can be complex and difficult to navigate. For more information about the new Section 83(i) and how it could apply to your business, call attorney Claire Kalia of Kalia Law, P.C. today. Our law firm offers a variety of different services for start-up corporations and other small businesses. We can address all of your legal concerns and questions about this new provision of the IRC and how it could be a benefit or detriment to your business.  

Benefits of Election

Some of the benefits associated with an IRC Section 83(i) election include the following:

  • When the election is granted, no income tax payment is required.
  • Employees are permitted to defer paying income tax on the stock for a maximum of five years post-vesting.
  • Once the stock vests, it becomes immediately eligible for treatment as a long-term capital gain.

Potential Company Duties and Risks

Pursuant to the new Section 83(i) of the IRC, companies are required to offer equity grants to 80 percent of all of the company’s eligible employees. If your company is deciding whether to implement one of these qualifying grant programs, there are several duties and risks that could arise. For example, your company must be sure to comply with all of the notification requirements listed in Section 83(i), meet all plan qualifications, and satisfy any and all tax-withholding requirements that are applicable.

Potential Employee Risks

In addition to duties and risks on the company’s end, there are several concerns associated with a plan election that might arise among company employees. Recipients of the stock option are sometimes concerned about having to pay employment taxes at the time of the RSU grant or option. Employees who opt in are also taking a risk that the stock value could go down at some point over the course of the deferral period.

Talk with a California Business Attorney Today

Qualified equity grant plans are complex matters, and it can be difficult to assess whether adopting such a plan is the right move for you and your business. If you are debating about what to do in this situation, attorney Claire Kalia of Kalia Law, P.C. can answer all of your legal questions and assist you with making an informed decision that could benefit your company.

To schedule a free consultation or case evaluation with a California business lawyer, please call us today at (650) 701-7617, or contact us online.  

- Claire Kalia

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