The American Taxpayer Relief Act and Employee Ownership

The American Taxpayer Relief Act of 2012 (ATRA), which Congress passed to temporarily avoid the fiscal cliff, did not directly focus on stock compensation or ESOPs, but a number of its provisions affect both. Most people are familiar with the changes to ordinary income tax rates and to capital gains, both of which affect the taxes and strategies of employees receiving stock compensation. Incentive stock options have long depended on Congress adjusting the alternative minimum tax (AMT) by passing an annual change to the income exemption amount (the so-called "patch"), but the new law sets those minimums at $50,600 for single filers and $78,750 for joint filers and permanently indexes those amounts to inflation. In addition, MyStockOptions.com points out that gains between September 27, 2010, and the end of 2013 on the stock of qualified small businesses will be exempt from capital gains tax and the AMT calculation, which will affect those who exercise options or hold restricted stock.

For those considering ESOPs, ATRA's higher capital gains tax rates increases the value of Internal Revenue Code Section 1042, which allows sellers of stock to C corporation ESOPs to defer capital gains tax on the sale proceeds, subject to meeting appropriate qualifications. The increase in the income tax rate may also increase the value of the S corporation tax benefit.