Stock options can be a very effective way for early-stage businesses to attract and retain talent. While offering stock options can be an easy and seemingly inexpensive way to hold on to talented workers, there are a few tax rules to keep in mind. In this blog, we’ll explore the most common and relevant tax code section related to using stock or stock options as part of a worker’s compensation – Internal Revenue Code § 83.
Stock as Taxable Income
The first thing any business, and worker, should consider when using stock as part of a compensation package is whether the stock, or stock option, will be treated as taxable income. Internal Revenue Code § 83 is a tax provision that applies to property, including stock and stock options, transferred to an employee in connection with the performance of services. Under § 83, the value of the property transferred is generally included in the employee’s gross income in the taxable year in which the property becomes vested. The value of the property is generally equal to the fair market value of the property at the time of vesting, minus any amount paid by the employee for that property.
Stock as Equity Compensation
§ 83 is of increased importance because it affects the tax treatment of equity compensation for both employers and employees. Employers need to be aware of § 83 when the following conditions apply:
Designing equity compensation plans and granting equity to employees, as it can impact the amount and timing of tax deductions that the employer can claim.
When receiving equity compensation, as it can impact the amount and timing of taxes that they owe.
An employee who receives equity compensation that is subject to § 83 may owe taxes on the value of the property when it becomes vested, even if they have not yet sold the property. This can create a cash flow issue for employees who may not have the funds available to pay the taxes owed, as well as coming as a surprise to the employee who most likely didn’t expect to have a tax liability on the options or shares they received.
Because of its potential impact on both employers and employees, it is important to understand § 83 implications when designing, granting, and receiving equity compensation. Fortunately, in most cases, an election under IRC § 83(b) most likely addresses everyone’s concerns.
Internal Revenue Code §83(b) election
“§83(b) election” refers to a provision in the United States Internal Revenue Code (IRC) Section 83(b). This section applies to compensatory stock options, restricted stock units (RSUs), and other forms of equity-based compensation that are granted to employees, consultants, or other service providers by their employers or clients. When a person receives equity-based compensation, like stock options or RSUs, there is often a vesting period during which they do not fully own or have the right to the equity. Vesting is a process by which an individual gains ownership rights to the equity over a certain period of time or upon the achievement of specific milestones.
The §83(b) election allows an individual to choose how they want to be taxed on the value of the equity they receive during the vesting period. Here’s how it works:
Standard Taxation: Without making an 83(b) election, an individual would typically be taxed on the value of the equity at the time it vests. This means that as the equity vests over time, the individual’s taxable income increases accordingly. For example, if an employee is granted stock options that vest over a four-year period and the value of the stock increases during that time, the employee will be taxed on the higher value as the options vested.
83(b) Election: By making an §83(b) election, an individual chooses to include the value of the equity at the time it was granted (not at vesting) in their taxable income for the current tax year, even though the equity has not yet fully vested. This can be advantageous if the equity’s value will most likely be fairly low at the time of grant and is expected to appreciate significantly by the time it vests.
By paying taxes on the lower grant value, the employee can expect to end up paying less in taxes compared to waiting until vesting. In addition, if the employee holds the equity for more than one year after making the election, any future appreciation in value will most likely be treated as long-term capital gain, resulting in a lower tax rate compared to ordinary income tax rates.
There are some risks, however. If the election is taken and the equity doesn’t end up vesting due to job loss or other reasons, the taxpayer will not get a refund for the taxes paid on the unvested equity. Also, the taxpayer will need to pay taxes on the value of the equity at grant immediately, even if they haven’t received any cash from it.
On balance, making the election under §83(b) is a good thing for both the start-up and the worker. Interested in learning more about developing stock option plans?
Around the world, nonprofits are tackling some of the biggest socioeconomic and environmental problems we face today. In the U.S. alone, the nonprofit sector represents the third largest workforce, employing over 12 million people. Nonprofit organizations continue to play an integral role in improving and sustaining communities, filling in gaps and providing opportunities to those most in need. In solidarity, we’re introducing a few of the nonprofits we’ve had the joy of working with, and sharing their mission to promote positive change.
Bridging the gap between small businesses and capital, non-profit community development loan fund Bridging Virginia provides education, technical assistance, and expert guidance for historically-marginalized businesses and not-for-profits in Virginia to thrive.
With an intentional focus on Care, Collaboration and Capital, Bridging Virginia provides support services around strategic business planning, financial health analysis, pre-lending support, marketing and sales growth. By helping businesses find flexible financial solutions, Briding Virginia is supporting the growth and ultimately, the success of communities throughout Virginia.
Common Good Alliance’s mission is to create aBlack Business District to help close the wealth gap for African Americans in Cincinnati, OH. By building local Black economies, Common Good Alliance aims to solve the pervasive challenges facing their communities such as high poverty, lack of home ownership and lack of business ownership.
Common Good Alliance was founded by diverse individuals willing to give and share power by investing their time, talent and treasure for the common good. By building local Black economies, Common Good is helping to solve high poverty, lack of home ownership and lack of business ownership in their communities.
The East Bay Community Foundation (EBCF) partners with donors, fund advisors, social movements, and the greater community to eliminate structural barriers, advance racial equity, and transform political, social, and economic outcomes for all residents of the San Francisco East Bay.
Through the development of arts and culture for social/racial justice, capital building via a racial equity lens, community organizing, and fostering inclusive economic models, EBCF is on a mission to advance an inclusive, fair, and just East Bay Area. The EBCF was one of the nation’s first community foundation and currently has 575 charitable funds under their stewardship, growing their impact and furthering their mission.
The Haven Home Foundation believe affordable and equitable housing is a basic human right. In providing housing to residents and then supporting those residents towards self sufficiency, the Foundation’s intended result is an increase in home ownership and generational wealth. Haven Home Foundation programming includes financial literacy, mental health counseling, career development, and more, all developed with a focus on finance, family and the future.
As the housing crisis continues to displace and destroy communities across the country, mission-driven organizations are hard at work developing innovative solutions aimed at addressing the failing system.
Often, communities struggle to have social impact as a result of environmental and economic shifts that appear, such as changing local demographics, gentrification, aging physical facilities, and resource challenges. The Institute was established to train, inspire and nurture social entrepreneurs within communities of faith and enterprises to rise above these challenges and maximize their overall social impact.
Crossing Capital will utilize this partnership to train, mentor and coach leaders on how to access multiple sources of capital to achieve the vision and mission of their organizations and promote positive social change.
Courage Housingis an investment firm that deploys capital to develop and operate multifamily developments where new Americans thrive. Courage Housing partners with refugee-focused nonprofits to provide tenants essential services like healthcare, employment opportunities, classes, social services, and more. Courage Housing is on a mission to bring together new and established Americans and foster thriving communities that embody the promise of hope, inclusion, and opportunity that America represents.
Doing Development Differently in Metro Detroit (D4)
Doing Development Differently in Metro Detroit (D4)aims to reinvent the development process, which too often unfairly burdens low-income families and people of color. D4 represents a diverse coalition of residents, labor, environmental, faith-based, and community organizations all committed to developing a built environment that creates “win-win” scenarios for the community, the economy, workers, and the environment.
New Way Homes
New Way Homes is on a mission to address the growing housing crisis in California by providing a pathway for mission-aligned land owners to use their land to help their communities without the burden of development and construction. New Way Homes commonly partners with churches, social services providers, organizations and individuals in possession of underused land who share their mission to revitalize communities through affordable housing.
Homekeep by Duo
Featured in last month’s newsletter, Chicago-based project Homekeep by Duoaims to eradicate the landlord-tenant housing model and replace it with a more equitable approach centered on neighborhood ownership. In purchasing small buildings at an affordable price now, Homekeep aims to graduate tenants to owners, extending more protection and ethical investment options to residents.
Each June we celebrate PRIDE, a month-long celebration that recognizes and honors our LGBTQIA+ community and their contributions to society. We use this time to not only acknowledge the challenges faced by this community, but to stand in solidarity as allies in their continued fight for equality and identity. Since the first Pride marches commenced in 1970, Pride was and still is resistance through visibility and joy. In commemoration, we’re highlighting the work of LGBTQIA+-led organizations pioneering change in communities far and wide.
Recompose is a queer, female-led human composting organization led by CEO Katrina Spade. Spade has been integral in developing and advocating for the legalization of human composting as an environmentally-friendly death care alternative. Now legalized in seven states, Recompose has composted over 250 people representing over 250 metric tons of carbon saved through a process called natural organic reduction (NOR). Essentially, their process turns human bodies into soil, creating a gentle way for human bodies to return to the earth after death. Through their regulation crowdfunding campaign, Recompose is working to change the future of death care and expand this offering to people all over the world.
Sugarwitch is founded and run by “a couple of flavor-obsessed queer food system nerds” who craft small batch, from-scratch frozen treats in St. Louis, Missouri. Owners Sophie Mendelson and Martha Bass’ ongoing commitment to building a more equitable food system is reflected across their organization, from using responsibly-sourced ingredients to utilizing fair labor practices. The name “Sugarwitch” is an ode to the celebrated witches of literature and lore, and also lends itself to a witch theme that “is an extension of Sugarwitch’s identity as a queer-owned business.”
Did you know Cutting Edge Capital is also a queer, female-led practice? As a strategic practice of our law firm, Cutting Edge Counsel, we provide fellow mission-driven organizations with creative capital raising solutions that are in alignment with their values and goals. Our legal experts use their experience, knowledge, and passion to assist businesses, cooperatives, and nonprofits with innovative and successful capital raising campaigns. Interested in a capital raise? Connect with us to schedule a complimentary consultation.
DENVER – CoPeace, PBC, a diversified impact holding company, has announced an investment in Social Venture ConneXion, LLC (“SVX US”), a financial services firm that operates an innovative online impact investment platform. CoPeace will be a co-owner in the venture with SVX Inc., a Toronto-based nonprofit that is registered as an Exempt Market Dealer (EMD) in Ontario, Quebec, Alberta, British Columbia, Saskatchewan, and Manitoba, and Cutting Edge Holdings, an affiliate of mission-driven law firm Cutting Edge Counsel.
Through its online impact investment platform, SVX US provides campaign preparation support, detailed profiles, automated transaction and subscription document processing, and capacity to deploy investments across multiple security, investor, and offering types, from direct public offerings to Reg D to nonprofit and co-op offerings. The platform allows investors to make debt and equity investments across a range of impact areas including climate, food, health, equity, housing, and community real estate. “We are thrilled that CoPeace is joining SVX US as a partner,” said Kevin Taylor, Associate Director, SVX Canada. “They have the right skills, experience and vision to advance our shared mission to make it easy for impact investors to find and make investments with positive local and global impact.”
SVX US simplifies the process of investing in alternative securities offerings that deliver meaningful change alongside the potential for financial returns. The investment platform’s vision is to make impact investing accessible to all investors who are increasingly interested in aligning their investments with their values.
CoPeace, through its unique holding company structure, is building a portfolio of carefully selected for-profit companies with measurable social and environmental impact. The company is working to democratize the investment world by allowing everyone, not just wealthy investors, to invest in private impact companies. In addition, CoPeace provides a variety of marketing, finance and sports consulting services to organizations demonstrating positive social or environmental impact. “We are excited about our investment in the SVX platform, for multiple reasons, but foremost are the shared impact mission alignment and the seamless ease of use of technology for investors to participate,” said Craig Jonas, CoPeace founder and CEO. “We will be bringing our marketing services to the SVX US investment platform, and our co-ownership gives us another way to help current and future impactful companies grow.”
Co-owner Cutting Edge Holdings is an investment affiliate of Cutting Edge Counsel, a California-based law firm that delivers legal and financial services that help mission-driven organizations raise capital in alignment with their values and goals so these organizations can build a more just, equitable and sustainable economy.
“As a new partner, CoPeace will add an incredible depth of marketing expertise to SVX US, which will strengthen our ability to achieve our mission and expose our listers to a broader reach of impact investors,” said Cutting Edge Principal Kim Arnone. “The CoPeace team’s marketing and branding skills will help our listers focus their pitch materials to reach mission-aligned investors. In addition, the CoPeace team brings deep experience in impact analysis and impact investing. We couldn’t be more excited about CoPeace becoming a co-owner of the SVX US platform.”
CoPeace, SVX US and Cutting Edge share a common vision: a world where all investments have a positive impact. All three organizations are working to help organizations and investors match money with meaning.
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CoPeace helps impactful companies grow. As an impact-driven holding company, CoPeace is building a portfolio of carefully selected businesses with measurable social and environmental impact. Additionally, CoPeace provides a variety of consulting services to organizations demonstrating positive social or environmental impact. As a fully certified B Corp and public-benefit corporation (PBC), CoPeace is committed to acting morally, ethically and responsibly in regard to society and the environment. Equity, inclusion and justice are not just valued at CoPeace – they are pillars supporting our mission. CoPeace was recently selected as an Emerging Impact Manager (EIM) for the ImpactAssets 50™ 2023 (IA 50). The EIM list represents firms with unique strategies, under-represented impact themes or diversity in leadership in view of the full IA 50 application pool.To learn more, visit https://www.copeace.com.
SVX US manages an investment platform to host impact investing opportunities and make it easier for impact investors to find and invest in deals aligned with their impact and financial goals. The organization helps social enterprises, including private issuers, CDFIs, nonprofit organizations, and funds, to best showcase their offerings and simplify the transaction process. The SVX US platform is a partnership of Cutting Edge, SVX Canada and CoPeace.
Cutting Edge Counsel is a law firm working to build an economy that works for everyone and provides opportunities for everyone to participate, thrive, and build wealth. Recognized widely for its capital-raising practice known as “Cutting Edge Capital,” the firm designs and implements community capital offerings and helps clients raise capital from their own communities in alignment with their values and goals.
The professional aviation community is full of skilled pilots who command aircraft across the globe. With the world more open than ever, it’s easy to assume that the pilot pool is just as wide and diverse. However, if that was the case, Cutting Edge client FlexAir would not exist.
Instead, FlexAir was developed to address this growing problem. With representation by women and people of color in the professional aviation community less than 5% despite decades of outreach and effort, the FlexAir flight school was created to serve the underrepresented.
FlexAir provides flight training, mentorship and coaching to veterans, minorities, and others who wouldn’t normally get a chance to enter the career field of aviation. FlexAir’s mission is to make the next generation of pilots more professional, diverse, and inclusive than ever before.
“We believe the pilot shortage is a mentorship shortage,” shared FlexAir Co-founder and CEO Paul Wynns. “We’re breaking away from the traditional training model of ‘you must have the right stuff’ to become a pilot by creating mentorship relationships with student pilots to raise them up instead of weed them out.”
As a member of the Citizen Potawatomi Nation, son of an immigrant family, and second-generation veteran, Paul Wynns long career in aviation and aerospace was devoid of mentors that looked like him. Reflecting on his experiences, Wynns realized that successful pilots not only possessed strong skills, they also had strong support systems of people behind them. This emphasis and need for mentorship led to the idea of “One Crew,” a combination of flight instruction and career mentorship FlexAir offers to all of its pilots.
Now, FlexAir is taking its mission to new heights with a recent acquisition of Air Associates Flight Training, a Kansas City flight school serving veterans and Department of Defense SkillBridge trainees. With plans to fly the world’s first all-electric, zero-emissions training aircraft, FlexAir is seeking impact investment partners to help the company grow and change the face of aviation. Learn more about FlexAir here.