Tax focus of employee stock incentive programs changed as a result of Tax Reform Act of 1986

Article Abstract:

The advantages of traditional employee stock incentive plans have been reduced by the Tax Reform Act of 1986. Non-qualified or restricted stock option plans may be preferable in certain circumstances. The tax consequences of non-qualified stock options depend on whether the option has a clear fair market value. If it does, the employee will be taxed upon receipt of the option. Non-qualified options benefit the employer because the employer is allowed a deduction upon issuing the stock. Employees do not have to recognize income upon receipt if there is no readily ascertainable fair market value of the option. Restricted stock is defined as stock that is subject to substantial risk of forfeiture, and the transfer of the stock is not free of that risk. The advantage of restricted stock option plans to employers is that the employer can take a deduction when the stock becomes vested.

Tax accounting

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Sale of employer securities to ESOPs still provides estate tax deductions after RA '87

Article Abstract:

The IRS Notice 87-13, IRB 1987-4, 14 says that deductions under the Tax Reform Act of 1986 for sale of employer securities to employee stock option plans are unavailable unless the person who dies directly owned the plan immediately before death. The deduction is only available as it relates to a domestic company that has no outstanding stock which is readily available on established securities markets. Decedents are also liable to a 'restrictive source' rule that says that the estate cannot drop the proceeds from sale of employer securities received previously in a distribution.

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Owners of closely held corporations can reap special benefits from ESOPs

Article Abstract:

An employee stock ownership plan (ESOP) provide by a closely held corporation can result in significant economic benefits for the employer, on the corporate tax return. However, ESOP organization can result in some disadvantages. An analysis of ESOP formation should be pursued and a close examination made. Various ESOP structurings are analyzed for their tax benefits to closely held corporations.

Mutual funds, Employee ownership, Close corporations, Closely held corporations, Buy-sell agreements

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