Hoosier Banker 35 While the exercise of ISOs does not result in taxable wages to the employee, the exercise may result in an alternative minimum tax impact to the employee. It is important for employees to review their individual tax positions at the time ISOs are exercised. Bank tax impact: The institution does not receive the federal income tax deduction for the spread when ISOs are exercised. However, if a disqualifying disposition occurs, the institution receives the tax deduction at the time of the disqualifying disposition. Restricted Stock Restricted stock is taxed differently than stock options. Restricted stock generally becomes taxable upon vesting. When a share of restricted stock becomes vested, it is included in the employee’s ordinary income in the year of vesting. Since restricted stock generally does not involve the employee paying an exercise price, the employee will have compensation in the amount equal to the fair market value of the stock at the vesting date. Section 83(b) election. A holder of restricted stock has the option to make an 83(b) election at the time of grant. If this election is made, the employee reports the fair market value of his or her shares as ordinary income on the date they are granted, instead of waiting until they vest. Making this election offers two potential benefits: • Paying tax based on the fair market value of the stock at the grant date, rather than the vesting date, which would result in a lower tax bill – assuming the fair market value increases between the grant and vesting date; • The holding period for long-term capital gain treatment begins at the time of grant, rather than at the time of vesting. On the surface, making the election may seem like an easy decision, given the benefits, but there also is some risk. If the employee leaves the institution before the restricted stock vests, all rights to the stock are forfeited, and the employee will not be able to recover the tax paid as a result of the election. Bank tax impact: The institution receives a deduction for the amount the employee is including in income at the same time the employee has the taxable event. Without an 83(b) election, the institution receives a deduction for the fair market value of the stock at the time of vesting. If an 83(b) election is made, the institution receives a deduction at the grant date for the fair market value at the date of grant. Equity-based compensation plans can support the growth of your bank by helping to recruit, retain and motivate top talent over the long run, but it is important to choose a plan that makes sense for your institution. That means carefully considering your specific objectives and the tax impact of any incentive program you put in place. HB As a leading global provider of entity management services, we offer you advantages few others can match. Our extensive range of services is available in a number of the world’s most attractive jurisdictions. See how our services and skilled professionals can make the difference on your next deal. For more insight on how we’ve successfully served clients on entity management transactions, contact one of our experienced professionals or visit wilmingtontrust.com/entitymanagement. Your experienced team for entity management services. DELAWARE & NEVADA INVESTMENT HOLDING COMPANY SERVICES | CUSTODY | COLLATERAL MANAGEMENT | TRUST SERVICES WILMINGTON TRUST RENOWNED EXPERIENCE | ENTITY MANAGEMENT MARY ALICE AVERY mavery@wilmingtontrust.com 302-636-6127 AMY STENGEL astengel@wilmingtontrust.com 302-651-8374 MINDY WALSER mwalser@wilmingtontrust.com 702-866-2203 Services are provided by Wilmington Trust, N.A. Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation (M&T). ©2017 Wilmington Trust Corporation and its affiliates. All rights reserved. CS14678_GCM EntityMang_ 7.375x4.375_Hoosier 2017R.indd 1 3/30/2017 8:58:16 AM
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