Discussion:S-Corp Distributions
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Discussion Forum Index --> Tax Questions --> S-Corp Distributions
| 24 October 2006 | |
| If you receive unvested shares in a S-Corp can you receive distributions from the S-Corp before they are vested? If yes how would those distributions be taxed?
Thanks | |
| October 24, 2006 | |
| Not sure what you mean by unvested. In an S corp, there can only be one class of stock, except for voting rights. You either own shares or you don't. If you do, then you will be taking income or loss based on the corps' activity for the year, regardless of any actual distributions of money. The money will generally not cause a tax effect, since the profit or loss does. If that helps. | |
| 24 October 2006 | |
| So, JR, if the S corp has issued shares that have a vesting schedule to them, have they in essence set up a second class of stock and risked inadvertant termination of their S status?? | |
| October 24, 2006 | |
| I dunno. I've never heard of a vesting schedule for stock. But just thinking out loud, again, you or someone else owns the shares. If shares are set aside, but you don't yet own them, someone else does, and the profit/loss will flow to that person until you own it. What a mess tho' if there are a lot of these, how do you close the books all the time and divvy it up right? I don't see second class of stock, but need more details. | |
John of PA (talk|edits) said: | 25 October 2006 |
| I don't see any reason why you could not receive distributions becasue you are not yet fully vested. Lets say you work for BellSouth and have unvested shares. When SBC (who now calls themself ATT) buys out BellSouth, the BellSouth shareholders will receive a distribution of some sort. Everyone would get this, even those who hold unvested shares in a qualified plan. I don't see any reason an S Corp would be different. Perhaps the proceeds of a distribution would be considered unvested, perhaps, but I see no reason why unvested shares would not get a distribution. I assume the unvested shares are in a qualified plan, so there would be no tax consequences. | |
| 25 October 2006 | |
| First in this case the unvested shares are not in a qualified plan.
Second, the shares are S Corp shares not from a C Corp. With a C Corp and dividend paid on the stock during the time before it becomes vested can not be treated as a dividend instead it is treated as compensation paid to you by the company on form W-2 not on a 1099-DIV. Can a S-corp that grants or awards stock to its employees then issue them a distribution before the stock becomes vested? My feeling is that you don't own the stock before it is vested. Therefore any money you would receive from the S Corp before your shares vested should be treated as W-2 income. Right? | |
Bottom Line (talk|edits) said: | 25 October 2006 |
| When does the stock become vested? | |
Bottom Line (talk|edits) said: | 25 October 2006 |
| I did a Google seach on stock vesting. Lots of hits but you may be able to find something there. | |
| 25 October 2006 | |
| Stock vest over 3 years. I also did a search on Google, Yahoo and IRS.Gov but all I can find is in the case of C Corp not S Corp. | |
| 25 October 2006 | |
| There's an excellent website www.mystockoptions.com that has tons of information on all aspects of stock transactions. A bit pricey - I think around $180 per year to be a member as I recall but it's a great site. Just FYI. | |
| 25 October 2006 | |
| John of PA - The reason those shareholders receive a distribution is because the qualified plan's grants and options are accelerated as a part of the sale, so the target can be assumed whole. My understanding is that there is nothing about an un-vested common share that would entitle the holder to a distribution of profits.
I am interested in this topic because I have had two s-corps convert to c-corps this year in order to put ISOP's in place. I have been wondering about some of the incentive alternatives that an S-corp has. It sounds to me that WBR might be holding restricted stock and that maybe where the distribution treatment question arises. Restricted stock agreements have vestment language in them to denote where the value limit placed on the granted shares by the agreement is removed. Unvested restricted stock will usually entitle the holder to their share of the profits upon grant. I have never seen this in an s-corp though. | |
| 25 October 2006 | |
| Under the regulations, non-vested stock (defined as non-transferable stock subject to a substantial risk of forfeiture) is not treated as outstanding stock of the corporation unless the shareholder has made an 83(b) election. If the shareholder has made an 83(b) election, the non-vested stock will be treated as a second class of stock unless the non-vested stock confers rights to distribution and liquidation proceeds that are identical to the rights conferred by the other outstanding shares of stock. | |
| 6 November 2006 | |
| For tax purposes, if an 83(b) election is made would the shareholder of the non-vested shares receive a K-1 from the s-corporations? | |
| 6 November 2006 | |
| Yes. Sect 83 (a) The excess of FMV over amount paid if any for the property shall be included in the income of the person performing the services. | |
| 7 November 2006 | |
| JCTMSTx you are correct when you said that the excess of FMV over the amount paid or in this case granted shares is taxable either at the point of vesting or earlier by filing the election. But, does that also mean that you are an owner ie that you are going to receive income/(loss) on those non-vested shares? Also, then would you be entitled to distribution on those non-vested shares? And if you did not make the election would you then not be entitled to take distribution and would you then not have to pickup the income/(loss) on those shares.
I agree that by filing the election you will pickup income for the amount that the FMV is greater than your cost basis but I can not find anything that deals with the fact of a non-vested shareholder and whether or not they would start to receive each year a K-1 income from the company and therefore be entitled to take distribution from the company. The rules are clearer for a c-corp that say any dividends paid on non-vested shares are treated as ordinary income and reported on the shareholders W-2 not on a 1099-Div. | |
| 1 February 2008 | |
| This discussion stopped in 2006 but doesnt' seem to fully answer the question I have and believe is still open.
An employee was granted restricted stock on Jan. 1st, meaning non-vested, non-transferrable stock that vests in 4 years. Although the intent was for the employee to file an 83(b) election and take the FMV into income, the filing was not done by the employee. I, the accountant, assumed it had been done and proceeded to treat his stock as outstanding. We provided quarterly tax distributions to all shareholders, including the non-vested one. Now, the S-Corp must figure out how to handle the distributions that were made all year to the non-vested sharholder. We realize they must be reclassifed into compensation/payroll. We need to fix the disproportioonate distributions issue. What we're not sure about is how to handle the K-1. The new restricted stock owner should/would have received a K-1 had he completed the 83(b) filing. But he didn't. We now assume that it's not appropriate to provide a K-1. His distributions will convert to compensation and will flow to net K-1 earnings. Does this make sense. Does anyone have some advice? | |
| 1 February 2008 | |
| Are there regulations that will allow the non-vested shares to be treated as vested and outstanding for tax and shareholder distribution purposes if a timely 83(b) election was not filed? | |
