H.R. 5719, Empowering Employees through Stock Ownership Act

H.R. 5719

Empowering Employees through Stock Ownership Act

Committee
Ways and Means

Date
September 22, 2016 (114th Congress, 2nd Session)

Staff Contact
John Huston

Floor Situation

On­­­­ Thursday, September 22, 2016, the House will begin consideration of H.R. 5719, Empowering Employees through Stock Ownership Act, under a closed rule. H.R. 5719 was introduced on July 11, 2016, by Rep. Erik Paulsen (R-MN) and was referred to the Committee on Ways and Means.

Bill Summary

H.R. 5719 allows a qualified employee to elect to defer, for income tax purposes, the inclusion in income of the amount of income attributable to qualified stock transferred to the employee by the employer. If an employee elects to defer income inclusion, the income must be included for the taxable year that includes the earliest of (1) the date the qualified stock is sold, exchanged or otherwise disposed of; (2) the date the employee first becomes an excluded employee (as described below); (3) the first date on which any stock of the employer becomes readily tradable on an established securities market; (4) the date seven years after the date the employee’s right to the stock becomes substantially vested; and (5) the date the employee elects to include the amount in income.

The proposal generally applies with respect to qualified stock, an employee’s right to which is not substantially vested before January 1, 2017.

Background

Specific rules apply to property, including employer stock, transferred to an employee in connection with the performance of services. These rules govern the amount and timing of income inclusion by the employee and the amount and timing of the employer’s compensation deduction.[1]

Under these rules, an employee generally must recognize income for the taxable year in which the employee’s right to the stock is transferable or is not subject to a substantial risk of forfeiture (referred to herein as “substantially vested”). Thus, if the employee’s right to the stock is substantially vested when the employee receives the stock, income is recognized for the taxable year in which received.

In the case of stock transferred to an employee, the employer is allowed a deduction (to the extent a deduction for a business expense is otherwise allowable) equal to the amount included in the employee’s income as a result of receipt of the stock.6 The deduction is allowed for the employer’s taxable year in which or with which ends the taxable year for which the amount is included in the employee’s income.

These rules do not apply to the grant to an employee of a nonqualified option on employer stock unless the option has a readily ascertainable fair market value. Instead, these rules apply to the receipt of employer stock by the employee on exercise of the option. That is, if the right to the stock is substantially vested on receipt, income recognition applies for the taxable year of receipt. If the right to the stock is not substantially vested on receipt, the timing of income inclusion is determined under the rules applicable to the receipt of nonvested stock.

For more information about how various stock transfers and stock options are treated under current law, please click here.

According to the bill sponsor, “This bipartisan legislation will accomplish two simple – but very important – goals: Keep America on the forefront of innovation and promote employee ownership at startup small businesses. Helping startups attract talent is an essential component of encouraging innovation and entrepreneurship, as well as inventing the next big idea or developing a life-changing technology.”[2]

[1] See JCT Report, Description of H.R. 5719
[2] See Rep. Erik Paulsen Press Release, “House Committee Approves Paulsen Bill to Empower Startup Employees,” September 14, 2016.

Cost

The Joint Committee on Taxation estimates that implementing the bill will reduce revenues by $1.3 billion over the 2017 to 2026 period.

Additional Information

For questions or further information please contact John Huston with the House Republican Policy Committee by email or at 6-5539.