The Section 83(B) Election for Restricted Stock: A Joint Tax Perspective
30 Pages Posted: 10 Sep 2005 Last revised: 21 Aug 2009
Abstract
In the wake of the Financial Accounting Standard Board's decision to require firms that grant employee stock options (ESOs) to treat such options as an expense, many large and sophisticated firms are switching from ESOs to restricted stock. Restricted stock - stock granted to an employee as part of her compensation and subject to the condition that if she leaves the firm within a period of time (often 3 years) she forfeits the stock - appears to be on its way to becoming the dominant form of equity-based pay in the United States. Yet, in spite of its prominence, little attention has been paid to how employers should design their restricted stock programs in light of tax considerations. The tax consequences to both the employee and the employer of a grant of restricted stock are deferred until the restriction lapses and the stock vests. There is however an exception to that general rule: If, within 30 days of receiving the stock, the employee makes what is called the Section 83(b) election, then both the employer and the employee are taxed at the time of grant.
Employing a joint tax perspective that looks at the tax consequences to both the employer and the employee, this paper attempts to answer several compensation design issues raised by the use of restricted stock. Specifically, I address the question under what circumstances should the employer charge the employee explicitly for her restricted shares and when should the employer charge implicitly for the restricted stock through a lower salary. I also look at the desirability to the employee, the employer, and the employee and employer together of the employee making the Section 83(b) election. Finally, I look at the value to the employee and cost to the employer of the employee's option to wait 30 days until making the Section 83(b) election.
Keywords: Restricted stock, Section 83(b) election, taxation, executive compensation, equity-based pay, employee stock options, tax planning, compensation planning
JEL Classification: G30, H20, J33, K34
Suggested Citation: Suggested Citation
Here is the Coronavirus
related research on SSRN
Paper statistics
Recommended Papers
-
What Do We Know About Capital Structure? Some Evidence from International Data
By Raghuram G. Rajan and Luigi Zingales
-
The Theory and Practice of Corporate Finance: Evidence from the Field
By John R. Graham and Campbell R. Harvey
-
The Theory and Practice of Corporate Finance: The Data
By John R. Graham and Campbell R. Harvey
-
Market Timing and Capital Structure
By Malcolm P. Baker and Jeffrey Wurgler
-
Market Timing and Capital Structure
By Malcolm P. Baker and Jeffrey Wurgler
-
Testing Tradeoff and Pecking Order Predictions About Dividends and Debt
By Eugene F. Fama and Kenneth R. French
-
Testing Static Trade-Off Against Pecking Order Models of Capital Structure
-
Optimal Capital Structure Under Corporate and Personal Taxation
By Harry Deangelo and Ronald W. Masulis
