Page 490 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)
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476 The Complete Guide to Executive Compensation
Award Vest Sell
Time Lapse Today Three years Five years
Stock price
• Fair market value $100 $130 $160
• Share price — — —
Individual
• Ordinary income — $130 —
• Long-term capital — — $30
gains
Company
• Tax deduction — $130 —
• Expense* $100 —
* Accrued over period of vesting
Table 8-55. Cliff vesting on three-year restricted stock
As was discussed in Chapter 3, the individual can elect to pay the tax on the value of the
restricted property at time of award (i.e., $100 not later than 30 days after date of transfer)
rather than waiting for the restriction to lapse. This is a Section 83(b) election, referring to the
section in the Internal Revenue Code. Doing so makes the cost basis for later LTCG $100,
and the LTCG tax payable on a $60 gain ($60 $100). The downside of this action is that
if the individual does not satisfy the vesting requirement and therefore does not receive the
stock, the person forfeits the tax amount, as it cannot be claimed as a tax deduction. Needless
to say, one must be very confident of receiving the stock and that the value of the stock at that
time will be greater than today. This is illustrated in Table 8-56.
Award Vest Sell
Time Lapse Today Three years Five years
Stock price
• Fair market value $100 $130 $160
• Share price — — $100
Individual
• Ordinary income $100 — —
• Long-term capital
gains — — $60
Company
• Tax deduction $100 — —
• Expense* — $100 —
* Accrued over period of vesting
Table 8-56. Section 83(b) election on three-year cliff vesting stock