Private RSU tax implications

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Topic Author
Yinks
Posts: 73
Joined: Fri Aug 10, 2018 1:07 am

Private RSU tax implications

Post by Yinks »

Looking to see if anyone has a similar experience and insight for me.

My employer is owned by a private equity firm. As an employee I was granted equity in the company several years ago with a vesting schedule. The first vesting period is coming up in a few weeks. Of course I can't convert it to cash because the company is still privately held (have to wait for a change of ownership transfer). I will check my paperwork and am hopeful it's a double trigger vest so that I don't owe taxes right now on the vest. All good.

Here's the issue (a good one!). The company has done really well and recently restructured its debt. As a result I will be getting a payment that the company is positioning as a "prepayment on the profit investors would get from the future sale of the company". The word "dividend" was also used to describe this payment.

I won't know the full details for another week or so. Trying to think about how this would be taxed and what I should be looking out for. Have others experienced this?

1. Although the company hasn't sold, I believe double trigger vesting means I don't actuality the equity and this don't owe income tax on the equity vest.
2. I'm not sure how the profit would be charterized for tax purposes. Income? Capital gains?
3. What kind of professional advice do I seek out to help me navigate this? Tax advisor, accountant, someone else?

Input on what I should be thinking about are appreciated!
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NewMoneyMustBeSmart
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Re: Private RSU tax implications

Post by NewMoneyMustBeSmart »

The usual context of "double trigger vesting" has to do with a company being acquired and then your job changing or being terminated [1].

I don't know if you'll have tax consequences. Although I wouldn't call it double-trigger (Although maybe that's what it is called in your context) if you don't have control of the RSUs until later, it's unlikely to me that the IRS would consider that as true gain. I'd recommend accountant for this.


[1] - https://capbase.com/bang-bang-what-is-s ... eleration/
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Topic Author
Yinks
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Joined: Fri Aug 10, 2018 1:07 am

Re: Private RSU tax implications

Post by Yinks »

NewMoneyMustBeSmart wrote: Sat Oct 16, 2021 6:46 pm The usual context of "double trigger vesting" has to do with a company being acquired and then your job changing or being terminated [1].

I don't know if you'll have tax consequences. Although I wouldn't call it double-trigger (Although maybe that's what it is called in your context) if you don't have control of the RSUs until later, it's unlikely to me that the IRS would consider that as true gain. I'd recommend accountant for this.


[1] - https://capbase.com/bang-bang-what-is-s ... eleration/
Double trigger in this case is 1. Vesting time had been met and 2. Company has a change of ownership.

If there was only single trigger (vesting time met) I would owe taxes on the vested shares but would have to come up with the cash myself to pay taxes. With double trigger I don't actually own the shares unless the company also changes ownership.

Regardless, I'm more focused on if the money I'm getting is capital gains or income.

Thanks for the tip to look for an accountant.
RonSwanson
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Re: Private RSU tax implications

Post by RonSwanson »

I had a similar contract with my employer at one point. You don't own any shares currently. Rather you have a deal such that under certain conditions (time + change of control), shares will be delivered to you. At this point, you will pay income taxes on the value of the shares received. If you were to hold the shares, the clock for long term capital gains would begin. Unless the change of control resulted in the shares converting to cash of course.

So this 'dividend' will not be treated as capital gains. It is straight income IMHO
Topic Author
Yinks
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Re: Private RSU tax implications

Post by Yinks »

RonSwanson wrote: Sun Oct 17, 2021 12:15 pm I had a similar contract with my employer at one point. You don't own any shares currently. Rather you have a deal such that under certain conditions (time + change of control), shares will be delivered to you. At this point, you will pay income taxes on the value of the shares received. If you were to hold the shares, the clock for long term capital gains would begin. Unless the change of control resulted in the shares converting to cash of course.

So this 'dividend' will not be treated as capital gains. It is straight income IMHO
Thanks. But in this case I still don't own the shares as there is no change in control. If I did own shares, at most I would only own a portion of them per the vesting schedule. Though this "dividend" is is being paid as a percentage of the full equity that I am granted.
scophreak
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Re: Private RSU tax implications

Post by scophreak »

I'm certainly not an expert on the subject, but it seems logical to me that your mentioned "dividend" would be treated as income. For capital gains to come into play, you would have to own actual shares (not restricted shares, unvested shares, or options) and then dispose of said shares. It's clear that is not what is happening in your specific case. This is likely not a true "dividend" either, at least as I understand it. Again, true dividends come from actual share ownership, which we have already established is not present here. Given that both of those conditions hold I don't see how the $ would be treated as anything other than income to be taxed at ordinary rates.
Topic Author
Yinks
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Re: Private RSU tax implications

Post by Yinks »

scophreak wrote: Sun Oct 17, 2021 7:37 pm For capital gains to come into play, you would have to own actual shares (not restricted shares, unvested shares, or options) and then dispose of said shares. It's clear that is not what is happening in your specific case. This is likely not a true "dividend" either, at least as I understand it. Again, true dividends come from actual share ownership, which we have already established is not present here. Given that both of those conditions hold I don't see how the $ would be treated as anything other than income to be taxed at ordinary rates.
Thanks, this makes sense to me. I will be asking my employer what kind of tax forms they will be giving me for this (W2 vs. 1099) to see how they are charterizing it. Based on what you suggest, I expect it to be classified as income.
DeepinHeartofBogle
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Re: Private RSU tax implications

Post by DeepinHeartofBogle »

I work in the private equity space focusing on tax. What I suspect is happening here, based on your description, is that the company relevered in order to return cash sooner to the fund investors (leveraged dividend). What I’ve seen is a partnership above the operating company and that partnership is where management team members invest. You may not have seen a K-1 yet if you are not vested. Possibly your “dividend” will be reported as a qualified dividend on a K-1 issued to you. I would just ask about how this will be reported. It is usually your company’s general counsel who will know.
EverydayWallSt
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Re: Private RSU tax implications

Post by EverydayWallSt »

I’ve received annual regular and special dividends on unvested RSUs before, but the company was public. I received more RSUs as my dividend payment. So, if I had 100 unvested RSUs and the dividend was 5%, I’d have 105 unvested RSUs afterwards. Don’t have all the details of your situation, which sounds like a dividend recap, but that’s how it played out for me.
Topic Author
Yinks
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Re: Private RSU tax implications

Post by Yinks »

I got more details from my company including information in writing from the private equity firm.

There are three line items detailed in writing:
A: Return of capital contributions (the original equity grant amount)
B: Distribution of net profits
C. Total dividend (A+B)

Ok so it's a dividend? Well not so fast! The total amount (C) will be paid to me via special a special payroll run through my employer and listed on my W2 and taxes will be withheld at "bonus" rates. But then the company says "this does not constitute tax advice".

What else besides "income" can money on your W2 be classified as? And if I only get a W2 (no 1099 or K-1) then isn't this clear that is not really a dividend but income?

I've always done my taxes myself. Rethinking that this year. Come tax time will the good people at HR block know what to do or do I need some more expertise and do I need it now?
hachiko
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Re: Private RSU tax implications

Post by hachiko »

So it sounds like your employer is classifying the payment as wages which are taxed at ordinary income rates, plus possibly employment taxes.

You can either try to pay a tax advisor for their thoughts on reporting it another way, or just accept the treatment. How much is this payment?
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marcopolo
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Re: Private RSU tax implications

Post by marcopolo »

Yinks wrote: Mon Oct 25, 2021 10:23 pm I got more details from my company including information in writing from the private equity firm.

There are three line items detailed in writing:
A: Return of capital contributions (the original equity grant amount)
B: Distribution of net profits
C. Total dividend (A+B)

Ok so it's a dividend? Well not so fast! The total amount (C) will be paid to me via special a special payroll run through my employer and listed on my W2 and taxes will be withheld at "bonus" rates. But then the company says "this does not constitute tax advice".

What else besides "income" can money on your W2 be classified as? And if I only get a W2 (no 1099 or K-1) then isn't this clear that is not really a dividend but income?

I've always done my taxes myself. Rethinking that this year. Come tax time will the good people at HR block know what to do or do I need some more expertise and do I need it now?
Are you sure these are actually stock shares, and not Phantom or Stock Appreciation

Privately owned companies will sometimes issue Phantom Stock Units (PSU) or Stock Appreciation Rights (SAR) as a way to act as equity grants. Payouts from these are treated as ordinary income (withheld at bonus rates, which is eventually taxed as ordinary income when you do your taxes).

EDIT: I see you mentioned original grant amount, that would imply they are PSU rather than SAR, the latter only payout the increase in value.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
Yinks
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Joined: Fri Aug 10, 2018 1:07 am

Re: Private RSU tax implications

Post by Yinks »

The original grant (A) is a 5-figure sum and the total "dividend" (C) is a 6-figure sum. Hence my want to better understand the tax implications.

Interesting comment about PSU. I looked it up and some of the initial info I'm reading aligns with my situation.
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