Maximizing Your Stock Compensation Benefits with Expert Insights from Matt Baran

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What Are The Different Types Of Stock Compensation, And How Can Employees Maximize The Benefits While Navigating The Tax Implications And Potential Risks?

Discover how understanding the intricate world of incentive stock options, non-qualified stock options, restricted stock units, and employee stock purchase plans can make a significant impact on your financial future. Matt Baran, tax manager at MP CPAs, walks us through crucial dates like grant, vesting, and exercise, making the complex timeline of stock compensation much clearer. We delve into the tax advantages of incentive stock options, including how they interact with the alternative minimum tax and capital gains rates, and unravel the straightforward tax treatment of RSUs.

We explore the strategic art of accelerating income with the 83(b) election, a tool that may reduce your tax burden when leveraged effectively. Matt emphasizes the importance of weighing tax implications and non-tax considerations, such as company performance and portfolio diversification when making stock compensation decisions. Expert advice from Matt encourages listeners to consult with a tax advisor to navigate these challenging waters. Tune in for an episode packed with actionable insights to optimize your stock compensation strategy and secure your financial future.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

Episode Transcript

Speaker 1 (00:04):
Welcome to the Knowing what Counts podcast, the
place where expert guidancemeets smart financial decisions.
Whether you're a high net worthindividual or a thriving
business, the experts at MPCPAsare here to help you protect and
optimize your wealth.
Let's get started, becausesuccess begins with knowing what

(00:25):
counts.

Speaker 2 (00:32):
Stock compensation can be a game changer for
employees, but it's not alwaysas straightforward as it seems.
Tax manager Matt Barronexplains how to make the most of
your shares while sidesteppingtax traps and potential pitfalls
.
Welcome back everyone.
I'm Sophia Yvette, co-host,slash producer, back in the

(00:53):
studio with Matt Barron, taxmanager at MPCPAs.
So, matt, how's it going?
Great?

Speaker 3 (00:59):
How are you Sophia?
I'm great.
How are you, sophia?

Speaker 2 (01:01):
I'm great.
So, matt, what is equitycompensation and what are the
benefits to companies andemployees alike?

Speaker 3 (01:11):
Yep.
So equity compensation is whena company provides stock in
exchange for either services orcapital.
So generally it's another formof compensation in addition to
your salary or bonus or thingslike that.

Speaker 2 (01:27):
So, matt, what are the most common types of stock
compensation?

Speaker 3 (01:31):
The most common types of stock compensation are stock
options.
So those are incentive stockoptions, also called ISOs.
There's non-qualified stockoptions, also called NSOs, and
then there's RSUs, which arerestricted stock units, and
there's also employee stockpurchase plans, which we'll
touch on all of those a littlebit today.

Speaker 2 (01:53):
What about some key dates regarding stock
compensation?

Speaker 3 (01:58):
Yep.
So some key dates are the grantdate, which is when the
employee is granted a right toeither purchase the shares or to
receive the share.
So, in the case of options, thegrant date is when they receive
the right to purchase.
If, for RSUs, it's when theyreceive the right to receive the

(02:18):
share sometime down the road.
There's also the vesting date,which is when the employee
actually receives the shares.
In terms of the restrictedstock units, there will be a
vesting schedule spread out overlikely five years, and then
they'll receive the sharesevenly in a five-year span.
And then there's also anexercise date which relates to

(02:41):
stock options.
So that's when you actuallypurchase a share, so that's when
you'll actually receive them.

Speaker 2 (02:49):
What are stock options exactly and how do they
work?

Speaker 3 (02:54):
Yep.
So stock options give employeesa right to purchase shares at a
given point in time and at aset price.
So there's two type of stockoptions incentive stock options
and non-qualified stock options.
So the taxation on those is alittle bit different.

Speaker 2 (03:13):
What is the biggest difference in the taxation on
those?

Speaker 3 (03:16):
So incentive stock options are generally more
beneficial for the employee, sothey are.
When they're exercised, there'swhat's called an AMT preference
item, so they are subject toalternative minimum tax.
However, that is reversible ina future year whenever you are

(03:37):
not subject to alternativeminimum tax.
So that's kind of just a timingdifference, but there is that
tax aspect to it.
And then, once you exercise theshares, there's a holding
period.
So you have to hold the sharesfor two years from the grant
date or one year from theexercise date in order to
qualify for the capital gain taxrates.

(04:00):
So, generally speaking, that'swhy incentive stock options are
most beneficial, because thereis an upfront tax of the.
But Down the road, as long asyou pulled it for that required
period, you will, you'll, one,reverse the AMT tax and then,
two, you'll get the capital gain.
So if you do not reach theholding period requirements,

(04:23):
that'll be taxes, ordinaryincome that's called a
disqualifying disposition, andthen for non-qualified stock
options, so those are taxed asordinary rates when they are
exercised.
They are exercised so thedifference of the set price at

(04:43):
the grant date versus the fairmarket value when you purchase
the shares, that's called thespread and you're taxed at
ordinary rates on that spread,and then your holding period
begins for the capital gainrates from there.

Speaker 2 (04:54):
So, matt, what are the RSUs and how are they
different from stock options?

Speaker 3 (05:01):
RSUs are when employees are granted stock over
certain vesting periods.
So that could either be alength of time or performance
metrics that you need to hit.
But so what makes themdifferent from options are you
actually receive the right tothe shares themselves sometime

(05:21):
down the road, rather than justthe right to purchase them.
So RSUs are not typically.
You're not paying any money outof pocket for them, and then
those are taxed at ordinaryrates, same as like your W-2,
when you receive them.
So it's taxed as the fairmarket value of the stock on the
vesting date and then fromthere your holding period begins

(05:45):
and then, if you reach thosethat one year hurdle, then it
upon a sale, it becomes capitalgains what about employee stock
purchase plans?

Speaker 2 (05:55):
what are they and what are the tax implications?

Speaker 3 (05:59):
yep, yep.
So employee stock purchaseplans allow employees to
purchase stock at a discountedprice.
So if your employees areoffered the right to purchase
shares at $10 when the fairmarket value is $12.
So they still are paying thatout-of-pocket cost.

(06:20):
However, they are receiving abenefit of that discount and
then, very similar to ISOs, theyhave the same holding periods.
So you need to hold it for twoyears after the offer date and
then one year after the actualpurchase date and then those
will qualify for capital gainstax rates as well.
Those will qualify for capitalgains tax rates as well.

Speaker 2 (06:41):
So, matt, how does an 83B election fit in with all of
this?

Speaker 3 (06:55):
So 83B elections are probably most typical for
startups.
What they are?
It's an election to accelerateincome from the entire vest.
Of restricted stock awards, forexample, you will be paid out
over a vesting schedule, but youcan make this 83b election in
order to elect to accelerate allthat income of the fair market
value over the total vestingperiod into the current year.

(07:18):
So that's why it's most typicalwith startups, because right
when a company starts out, theirfair market value of their
stock is generally going to bezero or very little.
So you can kind of take thathit of the ordinary income in
the current period.
And the benefit of that is twothings you don't get taxed on

(07:38):
the ordinary income as thosevests over the years, and that
also opens up the capital gainholding period as well for when
you eventually sell the stockdown the line.
So whatever ordinary income youaccelerate into the current
year, that is your basis.
Oftentimes it's zero.
It could be whatever you pickup as income that year and then

(07:59):
sometime down the road, that'syour basis when you sell the
stock.

Speaker 2 (08:04):
What about key considerations for employees
managing their equitycompensation?
What are those keyconsiderations?

Speaker 3 (08:12):
There's definitely a few things to think about.
Timing is probably the mostimportant factor.
Depending on which stockcompensation you're receiving,
the timing is going to vary.
So, like I mentioned theincentive stock options, you
want to be aware of that largetax bill that would come with
the AMT preference item.

(08:33):
You also, for all of them, youwant to be aware of the holding
periods so you are able tobenefit from the long-term
capital gain rate versus riskingany disqualifying dispositions
and being taxed at higher rates.
You also want to consider anyoutside income that you might
have.
If you already typically havehigh ordinary income, whether

(08:55):
that's from a spouse's job oranother method, then you want to
consider that when you'reaccelerating some income, like
in the example of an 83Belection, if there actually is
income that you're acceleratinginto the current year.
You want to consider that aswell, because you don't want to
be taxed at the highest ratespossible.
And then, just yeah, thevarious tax considerations of

(09:18):
the ordinary versus capitalgains.
And then there's also thenon-tax considerations of do you
believe in the long-term futureof the company, do you want to
be kind of over-invested in it,or do you want to maybe
diversify a little bit more, andthat would also maybe lead you
to sell some shares that youreceive.
So those are all things toconsider, lead you to sell some

(09:40):
shares that you receive.
So those are all things toconsider and, as always, it's
best to consult a tax advisor.

Speaker 2 (09:44):
Well, Matt, we'll catch you in the next episode.

Speaker 1 (09:54):
Have a fantastic rest of your day, thank you.
You, too, thanks for listeningto the Knowing what Counts
podcast.
Ready to optimize your wealthand protect your future, visit
thempgroupcpacom or call413-739-1800 to connect with our
team of experts.
Remember, success is aboutknowing what counts.