Question

On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. On receiving the restricted stock, Dave made the 83(b) election. Dave’s restricted shares will vest at the end of year 2. He intends to hold the shares until the end of year 4 when he intends to sell them to help fund the purchase of a new home. Dave predicts the share price of RRK will be $30 per share when his shares vest and will be $40 per share when he sells them. Assume that Dave’s price predictions are correct and answer the following questions:(Enter all amounts as positive values. Leave no answers blank. Enter zero if applicable.)

a. What are Dave’s taxes due if his ordinary marginal rate is 32 percent and his long-term capital gains rate is 15 percent?

grant date
vesting date
sale date

b. What are the tax consequences of these transactions to RRK?

grant date
vesting date
sale date

Answer 1

You will be taxed on the value of restricted stock as determined at grant (if section 83(b) election is filed). Such income will be taxable at his ordinary marginal rate of 32%. Further, any gain arising on sale of such stock will result in long term capital gain to the asseesee (Dave) and will be taxable at the rate of 15%.

As per the given question, following would be the tax consequences-

Dave

Grant date- No of shares* price per share* tax rate on such income i.e. 1000*7*32%= $2,240 will be the tax impact for dave.

Vesting Date- There will be no tax impact on vesting date as the assessee(Dave) has opted for 83(b) filing.

Sale Date- Dave will pay tax on the differential long term gain earned by him on sale of such shares i.e. difference between the sale price and the cost (on whcih tax has already been paid) i.e. difference between $40-$7

The tax impact would then be- $33*1000*15%= $4,950.

For the RRK Corporation

RSUs are a promise from the employer to deliver stock or cash to the employee in the future, based on the stock's performance. Since RSUs are not property, they are not governed by Sec. 83. Accordingly, there are no tax implications when employers grant RSUs. Rather, RSUs are deferred compensation taxed under Sec. 451 and are also potentially subject to penalties under Sec. 409A. Pursuant to Sec. 451, when RSUs are actually or constructively paid to the employee, the employer may take a compensation tax deduction equal to the wage income recognized by the employee (i.e., generally, the amount reported on Form W-2, Wage and Tax Statement). The employer is required to withhold applicable federal, state, and local income taxes from RSU payouts.