IRS clarifies new qualified equity grants. In response to requests from taxpayers and employers, the IRS issued Notice 2018-97 to provide initial guidance on new Sec. 83(i), which was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. Sec. 83(i) permits eligible private company employees to elect to defer for up to five years the recognition of income from private company stock acquired by exercising a stock option or settling a restricted stock unit (RSU) that was granted for performing services during a calendar year in which the employer corporation was an eligible corporation. The income deferral election applies to stock received due to options exercised of RSU’s settled after Dec. 31, 2017. IRS clarifies new qualified equity grants.
The IRS stated it received questions about a requirement that a qualified equity grant must be issued by the employer according to a written plan under which, in that calendar year, not less than 80% of all U.S. based employees who provide services to that corporation receive grants of stock options or RSUs with the same rights and privileges to receive qualified stock.
One such question was whether the 80% requirement applies on a cumulative basis so that employers can take into account stock options issued in previous years. The IRS said it believes that the statutory language requires employers to meet the 80% requirement in the calendar year in which the stock options or RSUs are issued. Counting options issued in previous years cumulatively with options granted in the current calendar year is contrary to the statutory language and not a reasonable, good faith interpretation of the 80% requirement, the notice stated.
Sec. 83(i) (6) also requires corporations to notify employees when qualified stock would be first includible in their gross income and of their eligibility to make a Sec. 83(i) election to defer the income, along with certain specified consequences of making the election.