JASON WEISZHAAR ACCOUNTING
babm.com/accounting
Jason Weiszhaar is a tax accountant with Kingery & Crouse, PA in Tampa, FL. Kingery & Crouse, P.A. is a full service public accounting firm with a staff of dedicated professionals providing audit (including SEC and employee benefit plan audits), tax and accounting services. You may contact Kingery & Crouse at 813-874-1280 or find us on the web at
www.tampacpa.com.
20 | NOV/DEC 2011
Every small business has been there. Your best employee asks for a raise, but you have limited cash flow available to support an increase. Do you find a way to cut costs elsewhere in order to placate your employee, or is there another option available?
For many small businesses today, the answer is found by providing equity awards, specifically restricted stock and stock options. Large companies have used these vehicles as a means of attracting and retaining quality employees for years and more and smaller companies are finding such awards can both reward employees for their contribution and performance, and foster a sense of partnership and commitment from them.
A Few Characteristics about Restricted Shares and Options
Often, shares and options issued to employees are restricted in some manner and vest over a period of time,or when certain performance goals are met. In addition, they may not be able to be sold until they are vested, or in some instances, until the business is sold or a liquidity event occurs (e.g. a public offering). While restricted stock can offer immediate ownership interest in the business, stock option grants represent the right to acquire ownership shares for a certain period of time at a specified price that is typically fixed on the grant date. The receipt of a stock option may not be as attractive as receipt of restricted stock to an employee because of the cost involved and because the options would be worthless if the value of the company’s shares fall below the employee’s strike price (unlike a stock grant which is generally granted at no cost).
weighing your options…
Tax and Financial Statement Implications
Since the Internal Revenue Code is more than seven times the length of the Bible, I am sure it will not surprise you to know that the tax treatment of restricted stock and stock option awards is different, and that this article is not designed to discuss all of the tax ramifications (including potential alternative minimum tax considerations) of equity based awards (or for that matter the impact of such awards on your financial statements).
Notwithstanding that, stock and option grants generally result in some amount of expense being recorded for financial statement purposes. In the case of stock options, the expense is normally equal to the value of the shares issued on the grant date, although some discounts may be applied for such things as lack of control and marketability. For tax purposes, on the other hand, the amount and timing of deductible expenses for a company depends on when the employee actually recognizes taxable income from the shares. Under current regulations, employees may choose to recognize income immediately upon the date the stock is granted in an amount equal to the stock’s value on that date by filing a Section 83(b) election for income tax purposes. If this election is made, there would be no difference between the company’s deduction and the income recognized by the employee for the shares. If the election is not made, however, the recipient would recognize income on the date any restrictions lapse in an amount
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