Update to Stock Option Treatment in Proposed Senate Tax Plan


Last week, we posted an article outlining the proposals in the House GOP tax plan that, if passed, would have a drastic effect on the treatment of stock options. That article can be found here.

Following the publication of our article, the Senate Finance Committee issued their own version of the “Tax Cuts and Jobs Act”. The Senate’s bill included a provision requiring the recognition of “ordinary income” upon vesting of the stock options instead of upon exercise or some other liquidity event, mirroring the original House bill in this respect, however, the House GOP has since removed this provision from their version of the bill. The Senate’s bill differed from the original House bill in that it did not include a provision allowing employees of private companies to defer any taxes upon the exercise of qualified stock options and restricted stock units for up to five years for so long as the company remains private. In essence, the Senate bill included the provision from the original House bill that hurt startup employees the most without providing them the relief of the tax deferment.

As could be expected, this resulted in great outcry among those in the startup community. Many powerful investors and startups in the community came together and issued a letter calling on the Senate Finance Committee to remove the provision entirely from the bill itself and follow the lead of their House colleagues.

In response to the outcry, members of the Senate Finance Committee released an updated version of the Tax bill that (i) deleted the provisions requiring that stock options be taxed upon vesting rather than exercise and (ii) included the House tax bill’s proposal that allows employees of private companies to defer any taxes upon exercise of qualified stock options and restricted stock units for up to five years, for so long as the company remains private.

If, like the House, the Senate passes their updated version of the bill, the final bill (or at least the portion regarding stock options) could be a welcome relief for startup employees.


Please be aware that the tax proposals are still very much in flux. We will continue to monitor the bills and provide updates on key developments as they go through the legislative process.

Scannavino Lamb LLP is a boutique law firm based in New York City offering legal and strategic advice to forward-thinking entrepreneurs, startup companies, and startup investors.  Founded by former Big Law lawyers with a range of experience in corporate law and business transactions, the firm serves its clients by blending world-class service with entrepreneurial perspective.  Check us out at www.scannavinolamb.com.

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