SPEED ROUND: Stock Compensation: Restricted Stock

Podcast Transcript

tax simpletons. Hello. My name is chase Berkey, CEO of dark horse CPAs. For those of you wondering where my co-host Justin Kern is it's worth noting that speed round episodes will just be myself and one of our dark horse CPAs. So fear not you we'll be back soon. Today's episode is another installment in our speed round series on stock compensation.

This time we'll be diving deeper into restricted stock in RSUs. Natalie, this sort of feels like it's becoming a regular thing. I, for one have enjoyed borrowing your time and insight on this subject. And I can assume our listeners have as well since this is such a hot topic in terms of inquiries. We get here at dark horse.

Yeah, I think we're getting pretty good at this. These short and sweet sessions seem to be hit with the listeners. I mean, after all, they can only listen to us talking about taxes for so long, right? A hundred percent. I mean, there is a reason that they pay us to

handle their taxes after all. So let's start the clock for five minutes, Natalie, what is restricted stock?

So restricted stock is essentially a transfer of stock from an employer to an employee that is usually subject to certain investing restrictions. And is restricted stock. The same thing as an RSU, actually, no RSUs, which Stanford restricted stock units represent a commitment to transfer stock or cash once the best thing conditions are met.

So there's no actual stock worded at the time of an RSU grant. Interesting. So what other differences are there between restricted stock and RSUs? Within RSU, you can not make an 83 view election, whereas you can with restricted stock, as a reminder and 83 B election pushes forward the taxation of the stock to the date of the election, as opposed to an invest in the future.

If the recipient believes the stock will continue to increase in value, there'll be wise to make an 83 B election so long as they believe they will be at the company long enough for the stock to vest. And what are common vesting periods that you've seen for restricted stock and RSUs. Typically, I see a four year vesting period with the one-year cliff, meaning that the employee must be with the company for at least a year before they start vesting.

And then it can best monthly, quarterly, or yearly from there on out. Ultimately it's dependent on whatever best thing scheduled the employee has put in place though. Gotcha. And when the stock is vested, that means it's yours, right? Right. Which is part of the risk of an 83 B election. You're electing to be taxed on their restricted stock before it's actually yours.

And you have to do it within 30 days of the grant. So there's usually a substantial period of time in front of you before the stock is bested. This is partially why the IRS allows

for this favorable tax treatment. So then for RSUs and restricted stock, that didn't have an 83 B election, how are these taxed?

So if you don't make an 83 B election, they're taxed when they best. So twenty five percent of your shares best in 2021. Then you'll have to pay tax on those shares in 2021, the income you'll pay tax on is the fair market value of the shares. That best team, which could be substantially higher than the price of the shares only grant date, which is why an 83 B election could be really advantageous.

This is especially true when you have a long vesting schedule. So over four years, because a lot can happen during that time. So what if a recipient makes an 83 B election and then they either never get the stock because it doesn't vest or it drops in value substantially from the time of the election.

Unfortunately, you don't really get a tax benefit. The only thing you could possibly get is a capital loss when you sell the stock, which has some rather substantial limitations in terms of how much you can write off in a given year. So would I rather have restricted stock or an RSU as compared to a stock option, like an ISO or an NSL?

For the most part. Yes. Because with any option, including an ESP, you have to pay money for the shares by exercising the option with restricted stock and RSUs. You're granted the stock without any need to purchase those shares. However, if you are offered the choice between stock options or presenting more shares than the, than what the company would offer in the form of restricted stock or RSUs, there would be a tipping point where the options would make more sense.

Understood. Well, if someone has a combination of stock in a company such as restricted stock, ISO's NSS, ESPs, et cetera, and wants to sell some of that stock, what should they be considering? Yeah. So they'll want to look at the basis and the holding period of all the stock in their account. So tracking everything becomes really important at this point.

Most importantly, they want to make sure they don't trigger a disqualifying disposition with any ISO stock. That would occur if they don't hold the ISIS stock for two years and a day from the date of grant or one year and a Bay from the date of exercise next, they would want to avoid selling any stock that has been held for less than a year.

As the taxes owed on short-term capital gains are taxed, ordinary income. That is unless the basis in their stock would be relatively close to the sales price. Ultimately, you're trying to minimize your tax in the current year, as well as set yourself up for lower tax bills and future years. Speaking of which, what sort of missteps have you seen from clients who haven't sought your advice?

Which I have to imagine would mostly be situations that you've inherited with new clients. Yeah. So I get a lot of calls from individuals who didn't report the sales of the stock correctly on their tax return. And as a result of receiving notices from the IRS. A lot of times employees who are granted RSUs don't think that there's any tax consequences when selling the shares since they were already taxed on the vest, none of the RSE was on their W2.

You're always required to report the sale stock in any given year on schedule D of your individual tax return also don't necessarily rely on the brokerage statements you received from selling the shares for listing your correct basis in the stock. This would be a method. Yeah.

So I get a lot of calls from individuals who didn't report the sales of the stock correctly on their tax returns. And as a result of receiving notices from the IRS, a lot of times employees who are granted RSUs don't think that there's any tax consequence when selling the shares. So they were already taxed on the best scene of the RSUs on their W2.

You're always required to report the sale of stock in any given year on schedule D of your individual tax return. Also. Don't necessarily rely on the broker statement you received from selling the shares for listing your correct basis in the stock. That would be the amount that you've already been taxed on.

You'll want to make sure that you're maintaining that basis information somewhere so that you can go back and reference it for completing your tax return when you do ultimately sell the stock. Well, there you have it folks that was our speediest round to date. So join us for our next speed round, where we'll dive deeper into ESG PS and Phantom stock.

Thanks again for tuning into TMS, or if you're not into the whole brevity thing, taxes made simple because there's TMI and then there's TMS.