Suppose you are an employee of Pactruck who just received 10,000 shares of restricted stock that vest in 4 years. Your current and expected tax rate on ordinary income is 35% and on capital gains is 15%. The stock is currently trading at $15 and you expect it to appreciate at 20% per annum over the next 4 years. You face an after-tax borrowing rate of 7%. You plan on selling the stock as soon as it vests. Should you simply hold the restricted stock through vesting and sell at that time or make a Section 83(b) election? As an alternative to the Section 83(b) election, you consider borrowing and purchasing additional stock using the money you would have used to pay the taxes on the Section 83(b) election. Evaluate this alternative. Discuss any nontax costs associated with a Section 83(b) election and the alternative borrow-and-buy additional stock strategies. What is the ex post outcome if the stock price appreciates at 15% per annum? At 10% per annum? Fails to appreciate at all? Declines by 5% per annum?
Answer to relevant QuestionsAssume the same facts as in Exercise 5. But now you expect your tax rate on ordinary income to decline to 20% in year 3. How do your answers in Exercise 5 change? Would you make the Section 83(b) election? Evaluate the ...Suppose Congress is expected to increase the corporate tax rate from 35% to 45% next year. RealNet. Com is scheduled to pay its CEO a salary of $1 million in the current period. The CEO’s tax rate is 40%. The CEO is also ...Three purported tax advantages of an ESOP are that the corporation can make tax-deductible contributions to fund the ESOP or pay down the principal on an ESOP loan, that qualified lenders can exclude from taxation 50% of the ...What are the tax and nontax factors in choosing between compensating employees by way of a pension plan versus a deferred compensation program? A newly established firm wants to establish a pension plan for its employees. The firm hires you to prepare a report comparing a defined benefit pension plan with a defined contribution pension plan. The firm also requires a ...
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