New Tax Benefit for Stock Options

In Notice 2018-97, the Internal Revenue Service (IRS) offered initial guidance on a new provision of the tax code, section 83(i).  The IRS indicated that they intend to issue proposed regulations that will include the guidance in this Notice.  

Section 83(i), added to the tax code by the Tax Cuts and Jobs Act in 2017, generally provides income tax rules for the treatment of property transferred in connection with the performance of services.  Section 83(i) allows, “certain employees to defer recognition of income attributable to the receipt or vesting of qualified stock.”

To take advantage of this income deferral, eligible employees would make an election under section 83(i) within 30 days of vesting in the stock.  If the employee elects to defer, then the deferral lasts to the earlier of:

  • The first date the stock is transferable
  • The date the employee becomes an “excluded employee” 
  • The first date the stock become readily tradable on an established securities market
  • The date that is five years after vesting or
  • The date the employee revokes the election

There are several limitations on making the election under section 83(i) including:

  • You must be a “qualified employee,” which is defined as not an "excluded employee." Excluded employees include: 1% owner, CEO, CFO, oe of the four highest compensated officers
  • The election must be related to “qualified stock”
  • The corporation issuing the options must be “eligible” 
    • Stock not readily tradable on established securities market
    • Not less than 80% of employees are granted options or Restricted Stock Units (RSU’s) 

The application of this new deferral under section 83(i) is very complicated, and this article only touches on it at a high level.  If you are considering this deferral, you should consult your tax advisor.