Many businesses seek to compensate their valued workers with equity interests. In some cases, the tax law allows that on very generous tax terms; in other cases the law not only denies tax benefits but imposes draconian penalties. We assist our clients in determining the best and most flexible ways to structure equity-based compensation.

Logo-Bullet Equity-Like Rights

We assist our clients in structuring stock options (both nonqualified options and those, such as incentive stock options or “ISOs,” that qualify for special benefits under particular circumstances). We can help partnerships and most LLCs issue profits interests without any current tax consequence. For entities that are not in a position to change their equity structures, we advise on synthetic equity arrangements such as stock appreciation rights.

Logo-Bullet Prohibited Tax Deferrals

There are many pitfalls to issuing equity for services. For example, they can create “phantom income” if a taxable event takes place without any cash being generated. In some cases, the tax law prohibits deduction of what it considers excessive compensation or “golden parachutes.” In other cases, severe penalties are imposed on tax deferrals that fall within the scope of Internal Revenue Code 409A. Even where the tax cost of mistakes nominally falls on the worker, all of these issues are employer issues because of tax withholding requirements. TaxGroup helps its clients detect such issues and plan to avoid violating the restrictions in a way that leads to penalties or violations of withholding requirements.