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house Bill H.R. 5719

Do Startup Employees Need the Ability to Defer Taxes On Stock Options They Exercise?

Argument in favor

This bill would help rank-and-file employees at startups exercise their stock options without facing a potentially prohibitive tax bill immediately after they exercise their options. That, in turn, helps fuel economic growth and job creation.

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09/22/2016
Yes to any decrease in the tax burden at any time for any person for any reason. I'll do you one better - eliminate the tax altogether. Explain how the government has any claim on the distribution of profits to shareholders (profits which have already been taxed as corporate income before they get distributed, by the way). When companies pay out a portion of revenue as wages and salaries, the government claims a tax. Then what's left over as corporate profit gets taxed (at the highest rate of any country in the world, mind you). Then when those profits get distributed to the owners of the company there is a further tax? Government is the worst business partner ever! Puts up no capital, assumes no risk, but expects half the revenue through various taxes!
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Ilyanep's Opinion
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07/14/2016
If I read this bill correctly, this would exempt employee exercises of Incentive Stock Options (ISOs) from being hit by the Alternative Minimum Tax. The latter was a tax intended to ensure that rich families don't use loopholes to avoid taxes, while the former is often granted to employees (often at Tech companies) so that they have a part-ownership of the company. However, many such employees, especially at private companies, are unable to liquidate their stock, thus leaving them hit with an unpayable AMT burden (especially if the private company goes under in the meantime), without having actually gained any income. Thus, a tool that the middle class can use to have part-ownership in their companies is no longer usable by anyone who doesn't already have the capital to pay the tax bill! This is absurd. We've already had to bail out tech employees who were screwed by this from the 2000 crash; let's not do it again.
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tormiller's Opinion
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10/21/2016
In many cases, stock options are given in lieu of a competitive salary. Startup employees take on a great risk of failure and taxing them is going to make them think twice about giving up their day job and pursuing their passion.
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Argument opposed

Employees at startup companies know what they’re getting into when they receive stock options. If they face a large tax bill when they exercise those options they’re responsible for making the arrangements they need to.

Steven's Opinion
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09/23/2016
I don't see any restrictions on how much wealth someone has in this bill, to qualify for this credit. So I just see this as another loophole Wall Street can use to avoid more taxes.
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Al's Opinion
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09/22/2016
Sick and tired of every possible tax break for the wealthy. Then disguise it so it looks like our legislators are doing something for regular people while what they're really doing is more tax cuts for the wealthy, their owners.
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Marrak's Opinion
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09/22/2016
This isn't for the common employee this is only for the elite and Rich
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What is House Bill H.R. 5719?

This bill would allow rank-and-file employees at startup companies to defer paying income taxes on money earned by exercising their stock options for up to seven years. Currently, such employees are required to immediately pay income taxes when exercising stock options, and if they don’t have enough cash to cover their tax bill they may have to exercise more of their options or not exercise them at all.

Eligible employees would be able to defer the income from their stock until either:

  • The stock is sold, exchanged, or transferred;

  • The employee becomes an excluded employee;

  • Company stock becomes readily tradable on an established securities market;

  • Seven years has passed after the employee’s stock becomes transferable or isn’t subject to a risk of forfeiture (whichever occurs sooner);

  • The employee chooses to include the money in their income.

Employees would be excluded from being able to defer their income taxes if they:

  • Own 1% or more of the company, are the chief executive officer, or chief financial officer;

  • Are a family member of such an individual;

  • Are one of the four highest compensated officers of the corporation.

Companies would be eligible if their stock isn’t readily tradable during the year or preceding year that the employee stock is exercised, or if it has a written plan under which at least 80 percent of all employees have the same rights and privileges to receive stock for the year. An eligible company would be required to notify employees of the option of deferring income, and meet specified withholding and reporting requirements.

Impact

Rank-and-file employees at startup companies; startup companies; and the IRS.

Cost of House Bill H.R. 5719

The CBO estimates that enacting this bill would decrease tax revenue by about $1 billion over the 2016-2026 period.

More Information

In-Depth: Sponsoring Rep. Erik Paulsen (R-MN) introduced this bill to help startup companies grow while empowering their employees through stock options:

“This bipartisan legislation will grow startup small businesses by helping make these jobs more attractive to top talent and empowering their employees. Startups and small businesses are the lifeblood of the American economy, and this commonsense fix will accelerate entrepreneurship and innovation.”

The House Ways and Means Committee passed this bill on a 21-to-12 vote, and it currently has the support of three bipartisan cosponsors in the House — including two Democrats and a Republican.


Media:

Summary by Eric Revell
(Photo Credit: Downingsf / Creative Commons)

AKA

Empowering Employees through Stock Ownership Act

Official Title

To amend the Internal Revenue Code of 1986 to modify the tax treatment of certain equity grants.

bill Progress


  • Not enacted
    The President has not signed this bill
  • The senate has not voted
  • The house Passed September 22nd, 2016
    Roll Call Vote 287 Yea / 124 Nay
      house Committees
      Committee on Ways and Means
    IntroducedJuly 11th, 2016

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    Yes to any decrease in the tax burden at any time for any person for any reason. I'll do you one better - eliminate the tax altogether. Explain how the government has any claim on the distribution of profits to shareholders (profits which have already been taxed as corporate income before they get distributed, by the way). When companies pay out a portion of revenue as wages and salaries, the government claims a tax. Then what's left over as corporate profit gets taxed (at the highest rate of any country in the world, mind you). Then when those profits get distributed to the owners of the company there is a further tax? Government is the worst business partner ever! Puts up no capital, assumes no risk, but expects half the revenue through various taxes!
    Like (40)
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    I don't see any restrictions on how much wealth someone has in this bill, to qualify for this credit. So I just see this as another loophole Wall Street can use to avoid more taxes.
    Like (18)
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    If I read this bill correctly, this would exempt employee exercises of Incentive Stock Options (ISOs) from being hit by the Alternative Minimum Tax. The latter was a tax intended to ensure that rich families don't use loopholes to avoid taxes, while the former is often granted to employees (often at Tech companies) so that they have a part-ownership of the company. However, many such employees, especially at private companies, are unable to liquidate their stock, thus leaving them hit with an unpayable AMT burden (especially if the private company goes under in the meantime), without having actually gained any income. Thus, a tool that the middle class can use to have part-ownership in their companies is no longer usable by anyone who doesn't already have the capital to pay the tax bill! This is absurd. We've already had to bail out tech employees who were screwed by this from the 2000 crash; let's not do it again.
    Like (10)
    Follow
    Share
    In many cases, stock options are given in lieu of a competitive salary. Startup employees take on a great risk of failure and taxing them is going to make them think twice about giving up their day job and pursuing their passion.
    Like (6)
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    Sick and tired of every possible tax break for the wealthy. Then disguise it so it looks like our legislators are doing something for regular people while what they're really doing is more tax cuts for the wealthy, their owners.
    Like (5)
    Follow
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    This isn't for the common employee this is only for the elite and Rich
    Like (3)
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    Only naive libertarians and uneducated conservatives would vote yes to this bill. What this bill essentially does is give free tax breaks to the wealthy and Wall Street. The problem with that is that if you keep cutting taxes, then you end up with less government revenue to pay off our massive debt. (Look at what Governor Brownback has done to Kansas!) My point is that libertarians and fiscal conservatives need to understand that cutting taxes for the rich will not grow the economy - we have been doing that for the past 30 years, and we are in an even worse economic situation!
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    This bill is yet another attempt to reduce taxes of the wealthy among us. There is no reason for people who exercise stock options to not pay the tax on their transactions. Old tax adage -- you make, you pay tax on it!
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    Does the government really need its hand in everyone's pocket? Especially those that are already going out on a limb for working for a start up?
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    Start ups are too small to be worth anything. Seven years will give the start up enough time to grow into something worth taxing. Plus, by deferring income taxes, these people may be able to reinvest in the company and create more jobs and grow faster as a result. At the very least they spend the money in the economy and it'll come back through someone else's taxes.
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    Why should employees of startups have any special treatment?
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    Why should they get a break, I think a pay cut for congress should be also looked at.
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    There is no problem here unless you are just trying to duck the IRS
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    That's the cost of doing business.
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    Why does there even need to be a large tax bill? Flat tax
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    Our economy depends on startups for job creation and increased quality of life. Policies that take this into consideration benefit all Americans. Startups need the smallest amount of barriers from policy - they already face a million barriers entering or creating a new market!
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    I think this deferral is too preferential for a class of workers who can properly budget for their tax burden of they save enough of their cash from the spread for their taxes. There has to be risk in exercise stock options, even if that risk is just from paying AMT. Profits without risk is a rent. I do understand the systemic risk of having so many workers be vulnerable to cash flow problems but if they're responsible and plan accordingly they can pay there taxes. The key is to educate employees who don't know about AMT, hold onto their shares and then get crushed by taxes. Also if we defer for 7 years won't that create a huge tax burden in the future, one that could be insurmountable to any personal savings?
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    Don't want to pay taxes? Don't exercise those options.simple
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    Just do it. Joining a startup means you are looking for high returns because of the huge risk your taking. Most companies offer stock options because salaries / benefits are less competitive
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    If this is ok, then why are you taxing social security, pensions, etc. That would benefit actual "rank and file."
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