Internal management buyouts may begin to make use of changes to a compensation provision in the tax code. The Tax Cuts and Jobs Act changes Section 83(i) of the Internal Revenue Code and allows private company employees to defer federal income taxes from stock options exercise or Restricted Stock Units vesting for up to five years.

As with all good news from the IRS, this tax deferral comes restrictions:

  •  Allows eligible employees of private companies to defer their federal income tax triggered by the exercise of stock options or the vesting of restricted stock units ("RSU")after 12/31/17
  •  This is available only to companies that have never had their stock tradeable on an established market AND that grant options and RSUs to at least 80% of their employees
  •  Applies only to stock options and RSUs granted as compensation for services
  •  Taxes are based on the value of the stock on the original exercise or settlement date
  •  To be eligible for this deferral the employee must not have: 1) served as the CEO or CFO, been one of the company's four highest paid officers in any of the prior 10 years or been a 1%+ owner of the business
  •  Employees are not allowed to make an 83(i) election if the company has repurchased any of its outstanding stock in the preceding year.

While not a particularly friendly ESOP tool, this deferral may have applications for internal buyouts.

Do you see an application of this deferral or do you think the restrictions will limit their use?

 

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