Tech star­tups fight Se­nate plan to change how stock op­tions are taxed

Texarkana Gazette - - MARKET REPORT -

WASHINGTON—Se­nate Repub­li­cans call their tax bill busi­ness-friendly, but tech­nol­ogy star­tups are fum­ing over a pro­vi­sion that would make a ma­jor change to how stock op­tions are taxed.

A key tool for star­tups to at­tract em­ploy­ees, stock op­tions are cur­rently taxed when they are cashed in. The Se­nate Repub­li­can tax bill an­nounced last week would tax the op­tions on the date they vest, mean­ing when the em­ployee is al­lowed to be­gin cash­ing them in.

The dif­fer­ence is sig­nif­i­cant be­cause em­ploy­ees of­ten hold on to their op­tions, hope­fully un­til those op­tions’ value rises with the growth of the com­pany. Un­der the pro­posed change, em­ploy­ees could face large tax bills be­fore they re­al­ize the in­come from cash­ing in the stock op­tions to pay them. The change would pro­duce about $13.4 bil­lion in ad­di­tional fed­eral tax rev­enue over the next decade, ac­cord­ing to an analysis by the con­gres­sional Joint Com­mit­tee on Tax­a­tion.

“This shift would have pro­found neg­a­tive con­se­quences for tech­nol­ogy star­tups by, among other things, un­der­min­ing their abil­ity to com­pete with large in­cum­bents,” said a let­ter from En­gine, an ad­vo­cacy group for tech­nol­ogy star­tups, that was sent Tues­day to Se­nate Fi­nance Com­mit­tee Chair­man Or­rin G. Hatch, R-Utah.

“Star­tups do not have the abil­ity to com­pete with larger firms based upon cash com­pen­sa­tion,” said the let­ter, signed by about 540 tech com­pa­nies, startup ex­ec­u­tives and ven­ture cap­i­tal­ists, most of them from Cal­i­for­nia.

The Na­tional Ven­ture Cap­i­tal As­so­ci­a­tion said on Twit­ter that it was “work­ing hard to re­move the pro­vi­sion” from the Se­nate bill, which Hatch’s com­mit­tee is con­sid­er­ing this week.

Ven­ture cap­i­tal­ist Fred Wil­son said the stock op­tion change “has pro­found im­pli­ca­tions for those who work in tech com­pa­nies and equally pro­found im­pli­ca­tions for the com­pet­i­tive­ness of the U.S. tech sec­tor.” “What this would mean is every month, when your eq­uity com­pen­sa­tion vests a lit­tle bit, you will owe taxes on it even though you can’t do any­thing with that eq­uity com­pen­sa­tion,” Wil­son wrote in a blog post.

“You can’t spend it, you can’t save it, you can’t in­vest it. Be­cause you don’t have it yet,” he said.

The dis­pute high­lighted the dif­fi­culty of en­act­ing ma­jor tax leg­is­la­tion as com­pa­nies and in­ter­est groups of­ten balk at changes aimed at them, such as the loss of tax breaks.

A sim­i­lar stock op­tion tax change was in the orig­i­nal ver­sion of the House Repub­li­can tax bill. But the pro­vi­sion was re­moved last week when the House Ways and Means Com­mit­tee ap­proved an amend­ment with sev­eral changes of­fered by the panel’s chair­man, Rep. Kevin Brady, R-Texas.

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