IRS Issues Final Rules on Qualified Cost Sharing Arrangements and Equity Compensation

The IRS has issued final regulations (T.D. 9088) governing the allocation of costs in developing intangibles related to stock options and other equity instruments in qualified cost sharing arrangements (QCSAs). QCSAs are procedures to allocate costs between U.S. companies and their controlled non-U.S. partners or subsidiaries. The regulations require that the income from the development of intangibles (such as a patent or a software program) be shared between the companies based on the relative costs each has borne in developing them. The new regulations, which were issued in the face of considerable industry criticism, require that equity pay be considered a cost. Companies can measure the value of the award either based on the intrinsic value of the award at exercise or a present value grant date estimation. Vested, unexercised awards are treated as if exercised at the date the QSCA terminates. If awards are repriced or modified in favor the employee, this can trigger a cost. The formal effective date of the new rules is for tax years beginning after the publication of final rules. In the interim, however, the IRS has indicated that companies should use these rules anyway. A copy of the rules can be found here on the IRS's site.