31 Oct Proposed Tax Legislation Encourages Employee Ownership in Startups
By: Rosemarie Hill, Labor and Employment Chair, Chambliss Law and David Hunter, Business and Tax Attorney, Chambliss Law
Congress is considering the Empowering Employees through Stock Ownership Act (EESO) (H.R. 5719, S. 3152) which aims to bolster employee ownership and spur innovation in startup companies. Startups seeking to grow the number of their employees will likely find the proposed legislation appealing.
Under current law, employees are generally required to pay taxes when they exercise their company stock options or when they vest in restricted stock– often at a time when they do not have available cash to cover the tax obligations that come with such exercise or vesting.
EESO applies to companies that issue stock options, restricted stock units, or restricted stock to at least 80% of their employees on more than an insignificant basis. Employees of such companies may elect to defer their tax obligation for up to 7 years beyond the date the benefit would otherwise be taxed.
The law is complex and contains a number of specific requirements, and you should seek professional advice on whether and how EESO may benefit your employees. For instance, the stock cannot be traded on an established market. Also, if the employee can sell the stock to the company when his or her rights in such stock first become transferable or vested, then that stock is not eligible for the tax deferral.
“Excluded employees” may not benefit from the tax deferral. An excluded employee is any individual:
- who is, or has been at any time during the 10 preceding calendar years, at least a 1% owner of the company;
- who is, or has been at any prior time, the CEO or CFO of the company or an individual acting in either capacity;
- who is a family member (spouse, child, grandchild or parent) of an individual described in 1) or 2) above; or
- who is, or has been for any of the 10 preceding taxable years, one of the four highest compensated officers of the company.
In addition, employees may also be precluded from the deferral if the company has repurchased any of its stock during the prior year.
The House Bill would allow taxes to be deferred for up to 7 years, and the Senate bill for up to 5 years. Once taxes are deferred, there are varying rules for when they are due.
Please review the law carefully and obtain professional advice to ensure you are aware of all the possible parameters of EESO and how, if enacted, it may provide a great benefit to your employees.