Restricted Stock Plan Rules & Guidance – Paul Gaulkin CPA

wall with ticker for stocksStock or other property that is transferred to a taxpayer by an employer as compensation for services rendered and that same stock is subject to certain restrictions that affect its value, the stock is considered restricted and is governed by the rules contained in Code Section 83.

As a general rule, the value of any property transferred in connection with services provided by the taxpayer is taxable as compensation, whether the property is goods, common stock, a partnership interest, or any other type of property. An exception to this rule is given to unsecured, unfunded promises to pay in which may or may not happen.

Property Substantially Vested

The property that is received by a taxpayer is taxable whenever the right to it is substantially vested. This means that the property must be either transferable or not subject to a substantial risk of forfeiture in order for it to be taxable under this rule.

The general rule is that compensation results if property is transferred in connection with services rendered. It is irrelevant whether:

1. Services are conduced as an employee or independent contractor
2. The property was transferred by the employer or another person
3. The property was transferred to the compensated person or to anyone else

If the property is sold before it is substantially vested, ordinary income results in the amount of the proceeds. But if the property is forfeited before it is substantially vested, no tax loss is incurred. If the property is forfeited after it is substantially bested and the value was reported as compensation, an ordinary loss with be allowed.

Property Not Substantially Vested

If property transferred in connection with services rendered has not substantially vested (subject to a substantial risk of forfeiture) a taxpayer may use Code Section 83(b) election to include the current fair market value of the property in gross income.

There are two main advantages of making the election, they include:

1. Any future appreciation will qualify as a capital gain, which may include being taxed at rates lower than ordinary income

2. The appreciation between the date of transfer and the date of substantial vesting is not taxed until the eventual disposition of the property in a taxable sale or exchange.

The main disadvantage of making the Section 83(b) election include the early declaration of tax that must be paid out by the taxpayer. Another disadvantage includes the inavailability of a loss deduction should the property be forfeited before it becomes substantially vested.

Substantial Risk of Forfeiture

A substantial risk of forfeiture exists if a person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by an individual.

The follow are a few examples of substantial risk of forfeiture:

1. The property must be returned unless the revenue successful goes up
2. Substantial services must be contributed
3. The successful completion of taking a company public

There can be many more examples that will qualify; these listed above are just a few of the main ones that are allowed by the IRS.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.


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