The Advisors' Blog

As Bruce Brumberg recently highlighted on myStockOptions.com, the “One Big Beautiful Bill” Act (OBBBA) introduced some tax changes that compensation committees and execs may want to consider when structuring pay programs with stock options and RSUs. One thing to consider is that due to the Bill’s phaseout of the increased SALT deduction, equity vesting dates could impact availability of the deduction. Bruce’s Forbes article on this topic points out that this may also create an “alternative minimum tax” issue for options:

Whenever you exercise incentive stock options (ISOs) and hold the stock, you need to consider whether this will trigger the AMT, as the exercise spread becomes part of your AMT income (AMTI). Dealing with the AMT will be more of a hassle for anyone with ISOs trying to obtain the preferential ISO tax treatment at sale. The denial of the SALT deduction under the AMT rules, where instead it’s added back to your income to increase your AMTI, will now play a bigger role. Given the quirky way in which AMT income is determined, taking SALT deductions up to the $40,000 cap could make it more likely that you will trigger the AMT with an ISO exercise/hold. (For details on the AMT calculation, see an FAQ at the website myStockOptions.com.)

The article also summarizes changes for pre-IPO companies that issue Qualified Small Business Stock (QSBS) after the date of the Bill:

For QSBS, the OBBBA increased the gross-asset test for companies eligible to issue QSBS to $75 million and raised the amount of the capital gain exclusion on your tax return to $15 million. It also added shorter stock-holding periods for the exclusion of capital gain income from taxes. Now there are three tiers:

– 100% exclusion for shares held five years
– 75% for shares held four years
– 50% for shares held three years

The article says that timing will be a big deal, since half of the law comes into effect for 2025, followed by the other half in 2026. That means “creative tax planning” will be in full force this year around stock option exercise strategies, charitable gifts, and deductions.

The biggest takeaway for me in all of this stuff is to remind executives and employees to consult their own tax advisors. Also, don’t forget the possibility of Section 16 issues for tax planning transactions! Alan Dye & Peter Romeo have created a lot of resources on Section16.net about how to report these types of transactions and avoid short-swing foot faults. And check out the memos we’ve posted on this site about the benefits and executive compensation implications of the OBBBA.

– Liz Dunshee