The IRS recently issued Notice 2018-97, providing clarification for a recent change in tax law regarding the value of qualified stock options from privately-held corporations, also known as Section 83(i). The notice outlines how employees can defer paying income tax on the stocks and restricted stock units given to them by employers for up to five years. Part of the extremely comprehensive 2017 Tax Cuts and Jobs Act, this notice is one in a series of reminders and clarifications the Internal Revenue Service has been giving to the public in order to prepare for 2019 when much of the law goes into effect.
What Is Section 83(i)?
Section 83(i) is a provision of the Tax Cuts and Jobs Act that pertains to income taxation, and opportunities for deferring the inclusion of specific company stocks for qualified employees. Normally, when you own stock, the value would be considered a part of your overall taxable income. The new adjustment allows employees to elect to hold off on this inclusion for up to five years, taking the alleviation in tax burden in the short term in return for paying it off at a later date.
When Do You Have To Pay?
The IRS has outlined five separate stipulations which would cause disqualification from this clause. In the event that an individual who elected for Section 83(i) falls into any of the following categories, they must pay the postponed taxes immediately:
- If the qualified stock becomes transferable, such as the event of exercising a stock option or settlement.
- If the elector shifts from being an employee to an excluded employee.
- If any of the stock from the issuing company becomes readily traded on the securities market.
- As soon as one reaches exactly five years from the date an individual initially elected to defer taxes.
- As soon as the user decides to revoke election of Section 83(i).
This is just a small window into the larger overall law. 2019 will be a year of learning for both the Federal government and its citizens. With so many sweeping changes being enacted in the new year, it’s understandable that occasional notices issued by the IRS will not be enough to fully inform everyone on the full effect and expectations of this change in public policy.