IRS Publication 525 — Taxable and Nontaxable Income

Pub. L. 115 -97 made a change in the law that allows a new election for “qualified employees” of private corporations to elect to defer income taxation for up to 5 years from the date of vesting on “qualified stock” granted in connection with broad -based compensatory stock option and restricted stock unit (RSU) programs. This election under section 83(i) is available for stock attributable to options exercised or RSUs settled after 2017. The corporation must have a written plan providing an RSU or option to at least 80% of U.S. employees. The recipients must have the same rights and privileges under an RSU or option plan.

The term “qualified employee” doesn’t include:

• 1% owner of corporation (current or any point during the prior 10 calendar years),

• Current or former CEO or CFO (current or any point previously),

• Family of previously mentioned individuals, or

• One of the four highest compensated officers (current or any point during the prior 10 calendar years).

The term “qualified stock” means any stock in a corporation that is the employer of the employee if:

• Stock is received relating to the exercise of an option, or

• Stock is received in settlement of an RSU, and

• An option or RSU was granted by the corporation. The term “qualified stock” can’t include stock from stock -settled stock appreciation rights or restricted stock awards (restricted property). It won’t include any stock if the employee may receive cash instead of stock. The section 83(i) election is made in a manner similar to the election under section 83(b) described under Choosing to include in income for year of transfer, later, under Restricted Property , even though the “qualified stock” isn’t restricted property. The election must be made no later than 30 days after the first date the rights of the employee in such stock are transferable or aren’t subject to a substantial risk of forfeiture, whichever occurs earlier. See Restricted Property , later, for how to make the choice.

Caution: You can’t use Form 15620, Section 83(b) Election, to make an election under section 83(i). For an election under section 83(i), follow instructions detailed in IRS Notice 2018-97 instead.

If an employee elects to defer income inclusion under the provision, the income must be included in the employee’s income for the year that includes the earliest of (1) the first date the qualified stock becomes transferable, (2) the date the employee first becomes an excluded employee (as excluded from “qualified employee”), (3) the first date on which any stock of the employer becomes readily tradable on an established securities market, (4) the date 5 years after the first date the employee’s right to the stock becomes substantially vested, or (5) the date on which the employee revokes their inclusion deferral election.