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The Florida Wineries Report Oct 24, 2021 | Read Time: 2 minutes

The Florida Wineries Report – August 2021

By Trevor Brewer

Three new Florida wineries were licensed in August 2021. Monthly Highlights Florida Wineries: Every manufacturer of alcoholic fruit wine, cider, perry, mead or kombucha is required to be licensed as a winery in Florida. The Florida Wineries Report reflects their taxpaid sales of these products. The Data: The Florida Wineries Report reflects data published by the Florida ABT, which is available online here. The ABT monthly publishes the taxpaid sales for each winery and distributor. Unfortunately, the ABT does not publish wineries’ sales to distributors. This means that the Florida Wineries Report reflects only wineries’ taxpaid sales, which are generally made in their tasting rooms. Each April and October, wineries with lapsed licenses and no taxpaid sales within the past 12 months are purged from the Florida Wineries Report. The New Wineries: Tropical Winery (Lake Placid), Three Hands Mead Co. (Plant City), Green Bench Brewing Co. (St. Petersburg). Total Number of Wineries: In August 2021, the total number of licensed wineries stood at 126. Of those, 123 wineries reported taxpaid sales for the month. Monthly Performance: Month-to-month taxpaid sales fell by 6.33% in August 2021. Total taxpaid sales during the rolling last-twelve-months (LTM) increased by1.59%. Average Monthly Production: For reporting wineries, the average taxpaid sales per winery in July 2021 was 97.96 gallons, a monthly decrease of 6.62 gallons per winery. Distribution: In July 2021, Florida breweries’ taxpaid sales accounted for 0.18% of all wine gallons sales in Florida (1.8 out of 1,000 wine gallons sold). Would you like The Florida Wineries Report as an Excel spreadsheet? Reports for this month and all months back to July 2021 are available at this link: https://brwlng.co/FLWineries Florida Wineries’ Monthly Taxpaid Sales This table shows each Florida winery’s taxpaid sales volume for the month. Not every Florida winery makes retail sales in a tasting room or taproom. Florida Wineries’ LTM Taxpaid Sales Our next table shows retail sales by each winery for the last 12 months (LTM) ending this month. Florida Wineries’ LTM Growth in Taxpaid Sales Our next table looks at the change in each winery’s LTM taxpaid sales from last month. This provides an estimate of a winery’s growth rate from one month to the next, at least to the extent of retail sales. The rightmost column identifies wineries that have less than 12 months of reported taxpaid sales. Florida Wineries With NoReported Activity Each month, a number of wineries report no retail sales or other taxable activities. The next table lists the licensed wineries that reported no activity for the twelve months through this month. Because we’re attorneys: Disclaimer.

The Florida Breweries Report Oct 24, 2021 | Read Time: 2 minutes

The Florida Breweries Report – August 2021

By Trevor Brewer

Florida breweries’ taxpaid sales in August 2021 fell below 10,000 in August 2021 for the first time since February 2021. Monthly Highlights The Data: The Florida Breweries Report reflects data published by the Florida ABT, which is available online here. The ABT monthly publishes the taxpaid sales for each brewery and distributor. Unfortunately, the ABT does not publish breweries’ sales to distributors. This means that the Florida Breweries Report reflects only breweries’ taxpaid sales, which are generally made in its taproom. Each April and October, breweries with lapsed licenses and no taxpaid sales within the past 12 months are purged from the Florida Breweries Report. The New Breweries: Alga Beer Co. (Pensacola), Turn 2 Brewing Company (Sebring), Deadwords Brewing (Orlando). From Brewpub to Production Brewery: No brewpubs upgraded to a production brewery this month. Breweries with a CMB license can fill growlers, sell bottled or canned products for consumption off premises, and sell to licensed distributors. Where a brewery upgrades its license, the tables below denote the CMBP license with * and the CMB license with ^. Total Number of Breweries: In August 2021, the total number of licensed breweries stood at 418. Of those, 387 breweries reported taxpaid sales for the month. Monthly Performance: Month-to-month taxpaid sales fell by 2.10% in August 2021. Total taxpaid sales during the rolling last-twelve-months (LTM) were up 2.02%. Compared to August 2020, LTM taxpaid sales were up by 15.36% in August 2021. Average Monthly Production: For reporting breweries, the average taxpaid sales per brewery in August 2021 was 25.68 barrels, a monthly decrease of 0.69 barrels per brewery. Distribution: In August 2021, Florida breweries’ taxpaid sales accounted for 0.86% of all beer sales in Florida (8.6 out of 1,000 beers sold). Would you like The Florida Breweries Report as an Excel spreadsheet? Reports for this month and all months back to January 2015 are available at this link: https://brwlng.co/FLBreweries. Florida Breweries Monthly Taxpaid Sales This table shows each Florida brewery’s taxpaid sales volume for the month. Not every Florida brewery makes retail sales in a taproom or brewery. Florida Breweries’ LTM Taxpaid Sales Our next table shows retail sales by each brewery for the last 12 months (LTM) ending this month. Florida Breweries’ LTM Growth in Taxpaid Sales Our next table looks at the change in each brewery’s LTM taxpaid sales from last month. This provides an estimate of a brewery’s growth rate from one month to the next, at least to the extent of retail sales. The rightmost column identifies breweries that have less than 12 months of reported taxpaid sales. Florida Breweries With NoReported Activity Each month, a number of breweries report no retail sales or other taxable activities. The next table lists the licensed breweries that reported no activity for the twelve months through this month. Because we’re attorneys: Disclaimer.

Beverage Legislation Oct 17, 2021 | Read Time: 3 minutes

Grains of Paradise, and What They Mean for Florida’s Alcohol Adulteration Statute

By Trevor Brewer

Florida’s 150 Year Old Alcohol Adulteration Statute The Florida Beverage Law is, in many instances, confusing, contradictory, and just plain weird. It is also unenforceable in some aspects. Take for instance Florida’s Adulterated Liquor Statute, Florida Statutes Section 562.455. First enacted in 1868, the relatively short Adulterated Liquor Statute makes it a felony of the third degree to include certain substances in alcohol. Whoever adulterates, for the purpose of sale, any liquor, used or intended for drink, with cocculus indicus, vitriol, opium, alum, capsicum, copperas, laurel water, logwood, brazil wood, cochineal, sugar of lead, or any other substance which is poisonous or injurious to health, and whoever knowingly sells any liquor so adulterated, commits a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084. Florida Statutes Section 562.455 (2021) Chances are, this statute is unenforceable in some respects. That was the conclusion of a federal court in 2020, and it got one “adulterator” taken off the list. The Case of the Aframomum Melegueta Prior to July 1, 2021, the verboten list of alcohol adulterators included one more: grains of paradise. Grains of paradise (scientific name Aframomum melegueta) is a species in the ginger family, closely related to cardamom. Its seeds are used as a spice (ground or whole); it imparts a pungent, black-pepper-like flavor with hints of citrus. It is also common known as melegueta pepper. Florida Law 2021-135 removed grains of paradise from Florida’s Adulterated Liquor Statute because a federal court found the law to be unenforceable, at least where grains of paradise are concerned. On January 28, 2020, the United States District Court for the Southern District of Florida held that the statute, specifically as it related to the use of grains of paradise in liquor, was preempted by federal law. The court found that the statute frustrated the purposes and objectives of the Federal Food, Drug and Cosmetic Act (FFDCA) and implementation of FDA regulations. Under FFDCA, the FDA has broad regulatory authority to monitor and control the introduction of “food additives” in interstate commerce. Florida’s Adulterated Liquor Statute was unenforceable because it prohibited the use of an additive that is generally regarded as safe by the FDA (referred to as GRAS). Source: Bill Analysis for Florida Senate Bill 1966 (2021). Will More “Adulterators” be Removed? What about the rest of the Florida statute’s list of alcohol adulterators? It seems likely that federal preemption applies to other entries on this list, particularly those that are general regarded as safe by the FDA (we’re looking at you, capsicum). Following is Florida’s list of the remaining substances forbidden to be included in alcohol: Cocculus indicus – known as moonseed; historically used to enhance giddiness Vitriol – probably referring to ether, which is also known as “sweet oil of vitriol” Opium – narcotic Alum – used as a flocculant to clarify turbid liquids and as a dye Capsicum – pepper plants; Capsicum frutescens L. (includes Tabasco pepper) and Capsicum annuum L. (includes bell, jalapenos, chili, and cayenne peppers) are GRAS Copperas – iron sulfate; used in iron supplements and as a dye Laurel Water – distilled from cherry laurel leaves; contains prussaic acid Logwood – probably referring to brushhollies or xylosmas; used as a dye; has narcotic properties Brazil Wood – also known as Pernambuco wood; used as a dye Cochineal – a parasitic insect; used to produce carmine (red) dye Sugar of Lead – lead acetate; has a sweet taste, which led to its historical use as a sugar substitute in wines and foods Do you have any questions about Florida’s Alcohol Adulteration Statute? Contact us at contact@brewerlong.com to schedule a consultation with a beverage attorney. Because we’re attorneys: Disclaimer.

The Florida Wineries Report Oct 2, 2021 | Read Time: 2 minutes

The Florida Wineries Report – July 2021

By Trevor Brewer

Florida’s makers of wine, cider, mead, and kombucha get their due. Introducing The Florida Wineries Report. Monthly Highlights Florida Wineries: Every manufacturer of alcoholic fruit wine, cider, perry, mead or kombucha is required to be licensed as a winery in Florida. The Florida Wineries Report reflects their taxpaid sales of these products. The Data: The Florida Wineries Report reflects data published by the Florida ABT, which is available online here. The ABT monthly publishes the taxpaid sales for each winery and distributor. Unfortunately, the ABT does not publish wineries’ sales to distributors. This means that the Florida Wineries Report reflects only wineries’ taxpaid sales, which are generally made in their tasting rooms. Each April and October, wineries with lapsed licenses and no taxpaid sales within the past 12 months are purged from the Florida Wineries Report. The New Wineries: This is the first Florida Wineries Report, so no new wineries this time. Total Number of Wineries: In July 2021, the total number of licensed wineries stood at 123. Of those, 120 wineries reported taxpaid sales for the month. Monthly Performance: Month-to-month taxpaid sales fell by 1.08% in July 2021. Total taxpaid sales during the rolling last-twelve-months (LTM) increased by 2.95%. Average Monthly Production: For reporting breweries, the average taxpaid sales per winery in July 2021 was 104.58 gallons, a monthly decrease of 1.14 gallons per winery. Distribution: In July 2021, Florida breweries’ taxpaid sales accounted for 0.21% of all wine gallons sales in Florida (2.1 out of 1,000 wine gallons sold). Would you like The Florida Wineries Report as an Excel spreadsheet? Reports for this month and all months back to July 2021 are available at this link: https://brwlng.co/FLWineries Florida Wineries’ Monthly Taxpaid Sales This table shows each Florida winery’s taxpaid sales volume for the month. Not every Florida winery makes retail sales in a tasting room or taproom. Florida Wineries’ LTM Taxpaid Sales Our next table shows retail sales by each winery for the last 12 months (LTM) ending this month. Florida Wineries’ LTM Growth in Taxpaid Sales Our next table looks at the change in each winery’s LTM taxpaid sales from last month. This provides an estimate of a winery’s growth rate from one month to the next, at least to the extent of retail sales. The rightmost column identifies wineries that have less than 12 months of reported taxpaid sales. Florida Wineries With NoReported Activity Each month, a number of wineries report no retail sales or other taxable activities. The next table lists the licensed wineries that reported no activity for the twelve months through this month. Because we’re attorneys: Disclaimer.

The Florida Breweries Report Oct 2, 2021 | Read Time: 2 minutes

The Florida Breweries Report – July 2021

By Trevor Brewer

For the first time since the Florida Breweries Report started in January 2015, there were no new Florida breweries added in July 2021. Monthly Highlights The Data: The Florida Breweries Report reflects data published by the Florida ABT, which is available online here. The ABT monthly publishes the taxpaid sales for each brewery and distributor. Unfortunately, the ABT does not publish breweries’ sales to distributors. This means that the Florida Breweries Report reflects only breweries’ taxpaid sales, which are generally made in its taproom. Each April and October, breweries with lapsed licenses and no taxpaid sales within the past 12 months are purged from the Florida Breweries Report. The New Breweries: None. Zero. Zilch. From Brewpub to Production Brewery: No brewpubs upgraded to a production brewery this month. Breweries with a CMB license can fill growlers, sell bottled or canned products for consumption off premises, and sell to licensed distributors. Where a brewery upgrades its license, the tables below denote the CMBP license with * and the CMB license with ^. Total Number of Breweries: In July 2021, the total number of licensed breweries stood at 415. Of those, 385 breweries reported taxpaid sales for the month. Monthly Performance: Month-to-month taxpaid sales fell by 2.33% in July 2021. Total taxpaid sales during the rolling last-twelve-months (LTM) were flat (0.00% change). Compared to July 2020, LTM taxpaid sales were up by 8.03% in July 2021. Average Monthly Production: For reporting breweries, the average taxpaid sales per brewery in July 2021 was 26.38 barrels, a monthly decrease of 0.49 barrels per brewery. Distribution: In July 2021, Florida breweries’ taxpaid sales accounted for 0.84% of all beer sales in Florida (8.4 out of 1,000 beers sold). Would you like The Florida Breweries Report as an Excel spreadsheet? Reports for this month and all months back to January 2015 are available at this link: https://brwlng.co/FLBreweries. Florida Breweries Monthly Taxpaid Sales This table shows each Florida brewery’s taxpaid sales volume for the month. Not every Florida brewery makes retail sales in a taproom or brewery. Florida Breweries’ LTM Taxpaid Sales Our next table shows retail sales by each brewery for the last 12 months (LTM) ending this month. Florida Breweries’ LTM Growth in Taxpaid Sales Our next table looks at the change in each brewery’s LTM taxpaid sales from last month. This provides an estimate of a brewery’s growth rate from one month to the next, at least to the extent of retail sales. The rightmost column identifies breweries that have less than 12 months of reported taxpaid sales. Florida Breweries With NoReported Activity Each month, a number of breweries report no retail sales or other taxable activities. The next table lists the licensed breweries that reported no activity for the twelve months through this month. Because we’re attorneys: Disclaimer.

ABT Sep 19, 2021 | Read Time: 4 minutes

Off-Site Alcohol Service by Florida Retailers

By Trevor Brewer

Alcoholic beverage retailers–including bars, restaurants, breweries, wineries, and distilleries–are often asked to provide off-site alcohol service–catering–for a range of events. In Florida, there are a limited number of ways in which an alcohol retailer can participate in providing alcohol service away from its licensed premises. Option 1: Sales to Private Party for Open Bar Alcohol retailers that have a license that permits sales for consumption off premises can supply a private party to host an open bar event. For instance a wine or beer bottle shop with a 2APS license can provide all the beer or wine to be served by the host at a wedding reception. The same is true for a bar, restaurant, brewery or winery with a 2COP license. Each of these retailers can sell wine or beer in cans, bottles, or kegs, and they can provide keg service equipment. Even a craft distillery gift shop can sell to a private party bottled liquor, now in unlimited quantities under the recently changed craft distillery law. However, this option does not permit two activities: First, the alcohol retailer cannot provide bartending service for the event. Second, the host of the event cannot resell the alcohol at the event–open bar only. Option 2: Sales to an Licensed Alcohol Caterer Alcohol retailers that have an off-premises consumption license can sell alcohol to the holder of a 13CT alcohol catering license. See Florida Statutes Section 561.20(2)(a)5. Generally, one licensed retailer is not permitted to purchase alcohol from another licensed retailer. One of the few exceptions to this rule is a licensed alcohol caterer (requirements for acting as an alcohol caterer are discussed below). Licensed alcohol caterers are permitted to purchase alcohol directly from a retailer that is licensed to sell alcohol to individuals for off-premises consumption. Licensed alcohol caterers are permitted to operate a cash bar at a private event (assuming compliance with other state laws and local ordinances). After the event, the alcohol caterer is required to leave the remaining alcohol with its private customer or return unopened alcohol to the retailer, provided the retailer will accept the return. Under this option, the alcohol retailer again is not permitted to provide bartending service for the event, but the alcohol caterer can provide this service. Option 3: Sales for a Non-Profit Event Similar to Option 2, alcohol retailers that have an off-premises license can sell alcohol to a non-profit organization or municipality for a permitted non-profit event. Non-profit organizations and municipalities are eligible to obtain a One, Two, or Three Day Permit (ODP) from the Florida Division of Alcoholic Beverages and Tobacco (ABT). See Florida Statutes Section 561.422. The ODP permit allows the organizer of a non-profit event to serve or sell beer, wine, or liquor at the event (assuming compliance with other state laws and local ordinances). Like the licensed alcohol caterer, the ODP event organizer is permitted to purchase alcohol directly from an alcohol retailer with an off-premises consumption license. The non-profit event host is permitted to reseller alcohol at the event. Presumably, the alcohol retailer is permitted to provide bartending services to the event host (no provision of the Florida Beverage Law or regulations seems to prohibit this). However, all net profits from sales of alcoholic beverages at the event must be retained by the non-profit organization. Option 4: Alcohol Catering with a 13CT License As discussed above, the holder of a 13CT alcohol catering license is permitted to sell and serve alcohol at a catered event. A licensed alcohol retailer can hold a 13CT alcohol catering license and provide catering services directly in certain circumstances. To obtain a 13CT alcohol catering license, the retailer must first have a public food service (PFS) license issued by the Florida Division of Hotels and Restaurants. That is, the retailer must be licensed as a restaurant, mobile food vehicle, or food caterer. A retailer with a 13CT alcohol catering license may sell alcohol (beer, wine, or liquor) at events for which it also provides the food catering. Moreover, the retailer must derive at least 51% of its gross food and beverage revenue from the sale of food and nonalcoholic beverages at each catered event. A 13CT licensed alcohol caterer cannot sell only alcohol at the event. See also Working with Beverage Caterers. Option 5: Alcohol Catering with a Quota License A retailer with a 4COP or 3PS quota license is also permitted to sell and serve alcohol at a catered event. Importantly, this does not include a restaurant that holds a 4COP-SFS license, which prohibits sales for consumption off-premises (although such a restaurant could hold a separate 13CT license). Unlike a 13CT licensed alcohol caterer, a quota licensed retailer is not required to derive at least 51% of its revenue from the sale of food and nonalcoholic beverages at each event. However, each catered event must have prepared food is provided by a caterer by the Florida Division of Hotels and Restaurants. See also Alcohol Catering with Florida Quota License. Do you have any questions about off-site alcohol service by Florida retailers? Contact us at contact@brewerlong.com to schedule a consultation with a beverage attorney. Because we’re attorneys: Disclaimer.

ABT Sep 12, 2021 | Read Time: < 1 minute

Searchable Penalty Guidelines Table

By Trevor Brewer

What happens when a Florida licensed beverage company violates the Florida Beverage Law? In 1994, the ABT issued penalty guidelines concerning single and repeated violations of the Florida Beverage Law. While these penalty guidelines have not been updated to reflect all changes to the law since 1994, it is a helpful guide to the ABT’s disciplinary actions. Unfortunately, the official publication of the penalty guidelines (available on the Florida Department of State website) contains a non-searchable table of violations and penalties. To make life easier for the folks who need to understand these guidelines, we have created a searchable reproduction of the table. Find the searchable Florida Beverage Law Penalty Guidelines under the Resources tab or by clicking this link: Florida Beverage Law Penalty Guidelines. Do you have any questions about the Florida Beverage Law penalty guidelines? Contact us at contact@brewerlong.com to schedule a consultation with a beverage attorney. Because we’re attorneys: Disclaimer.

Brands Sep 5, 2021 | Read Time: 2 minutes

Alcoholic Beverage Contract Manufacturing in Florida: Two Model Processes

By Trevor Brewer

Sometimes an alcoholic beverage brand developer wants to focus on developing and promoting a product brand and leave the manufacturing to someone else (sometimes called “white labeling”). This can mean good business for the manufacturer too. Whether the product is classified a beer, wine, or distilled spirits, a variety of contract manufacturing arrangements are available in Florida. This article describes two model contract manufacturing arrangements: (1) contract manufacturing with a licensed brand owner, and (2) contract manufacturing with an unlicensed brand owner. Contract Manufacturing with Licensed Brand Owner Brand owners that have a Florida manufacturer (CMB, AMW, or DD) license or a Florida Broker-Sales Agent (BSA) license can contract with a contract manufacturer to make and package the products and deliver them to a licensed distributor. This is often the best arrangement when the brand owner wants to take an active role in the supply process and wants to designate its own distribution partners. In this arrangement, the contractor sells the finished products to the licensed brand owner and delivers possession directly to the distributor. For the brand owner, this means that it can collect payment directly from its own distributors. For the contractor, this means that it is not required to add the brand owner to its own manufacturing license. Contract Manufacturing with Unlicensed Brand Owner In some cases, the brand owner does not have a Florida manufacturer license or BSA license. This might be the case where the brand owner is content to let its products be sold through the contract manufacturer’s own distribution partners. In this arrangement, the brand owner grants to the contract manufacturer a license to make the products, and the contract manufacturer pays the brand owner a licensing royalty. For the brand owner, this means that it will be paid directly by the contractor. For the contractor, it means that the brand owner because an Interested Party that must be included on its manufacturing license. Do you have any questions about alcoholic beverage contract manufacturing in Florida? Contact us at contact@brewerlong.com to schedule a consultation with a beverage attorney. Because we’re attorneys: Disclaimer.

The Florida Breweries Report Aug 29, 2021 | Read Time: 2 minutes

The Florida Breweries Report – June 2021

By Trevor Brewer

Florida breweries had a mixed June 2021, with monthly taxpaid sales numbers down but LTM taxpaid sales numbers up. Monthly Highlights The Data: The Florida Breweries Report reflects data published by the Florida ABT, which is available online here. The ABT monthly publishes the taxpaid sales for each brewery and distributor. Unfortunately, the ABT does not publish breweries’ sales to distributors. This means that the Florida Breweries Report reflects only breweries’ taxpaid sales, which are generally made in its taproom. Each April and October, breweries with lapsed licenses and no taxpaid sales within the past 12 months are purged from the Florida Breweries Report. The New Breweries: Two new Florida breweries in June 2021: Alafia Brewing Co. (Gibsonton) and ShotPaQ (Sarasota). From Brewpub to Production Brewery: Two breweries upgraded from a brewpub license (CMBP) to a production brewery license (CMB) this month: String Sports Brewery (Jacksonville) and Blue Springs Brewing (Orange City). Breweries with a CMB license can start fill growlers, sell bottled or canned products for consumption off premises, and sell to licensed distributors. Where a brewery upgrades its license, the tables below denote the CMBP license with * and the CMB license with ^. Total Number of Breweries: In June 2021, the total number of licensed breweries stood at 415. Of those, 387breweries reported taxpaid sales for the month. Monthly Performance: Month-to-month taxpaid sales fell by 6.39% in June 2021. Total taxpaid sales during the rolling last-twelve-months (LTM) increased by 1.93%. Compared to June 2020, LTM taxpaid sales were up by 5.48% in June 2021. Average Monthly Production: For reporting breweries, the average taxpaid sales per brewery in June 2021 was 26.87 barrels, a monthly decrease of 1.91 barrels per brewery. Distribution: In June 2021, Florida breweries’ taxpaid sales accounted for 0.79% of all beer sales in Florida (7.9 out of 1,000 beers sold). Would you like The Florida Breweries Report as an Excel spreadsheet? Reports for this month and all months back to January 2015 are available at this link: https://brwlng.co/FLBreweries. Florida Breweries Monthly Taxpaid Sales This table shows each Florida brewery’s taxpaid sales volume for the month. Not every Florida brewery makes retail sales in a taproom or brewery. Florida Breweries’ LTM Taxpaid Sales Our next table shows retail sales by each brewery for the last 12 months (LTM) ending this month. Florida Breweries’ LTM Growth in Taxpaid Sales Our next table looks at the change in each brewery’s LTM taxpaid sales from last month. This provides an estimate of a brewery’s growth rate from one month to the next, at least to the extent of retail sales. The rightmost column identifies breweries that have less than 12 months of reported taxpaid sales. Florida Breweries With NoReported Activity Each month, a number of breweries report no retail sales or other taxable activities. The next table lists the licensed breweries that reported no activity for the twelve months through this month. Because we’re attorneys: Disclaimer.

General Business Aug 22, 2021 | Read Time: 5 minutes

Taxes on Restricted Stock for Employees

By Trevor Brewer

Beverage manufacturers, distributors, and vendors–like other closely held companies–often use grants of their own stock to compensate and incentivize employees, consultants and other providers (for simplicity, this articles refers to all of them as “employees”). These grants have major tax consequences. News Flash: Stock Grants are Subject to Income Taxes Generally, when money or property is given to an employee, consultant, or other person or firm in connection with services provided to the company, the value of that money or property is treated as taxable compensation. This has profound implications for both the employee and the company. For the employee, the compensation is subject to federal and state income taxes and the employee’s share of employment taxes. For the company, the payment of compensation to employees requires income tax withholdings to be withheld, and the company is also responsible to pay the employer’s share of employment taxes. This may be easily understandable when the employee is paid money, but it gets much more complicated when the employee is paid with the company’s stock, which may be subject to restrictions. While this article speaks in terms of corporations granting restricted stock to employees, it is important to recognize that the same analysis applies to LLCs that have elected to be treated as a corporation for federal income tax purpose. Even though an LLC might issue membership units instead of stock, electing S corporation treatment causes the LLC and its employees to be subject to the same rules concerning restricted units and unit options. 5 Factors Matter for the Taxation of Restricted Stock When employees, consultants, and others are granted stock in the company, the tax consequences depending on the following factors: Whether the stock is subject to a risk of forfeiture The vesting period The value of the stock at vesting (or earlier in the case of a Section 83(b) election) How long the stock is held by the employee prior to sale The price at which the employee sells the stock Restricted Stock is not Earned Until it Vests For income tax purposes, compensation paid with stock is earned by the employee when it is no longer subject to forfeiture. That is, while there are restrictions tied to the stock which mean that the employee could lose the stock (because of termination of employment, for instance), the restricted stock is not immediately treated as taxable income to the employee. It is not until the stock vests–when the company cannot freely take back the stock–that the stock is earned for income tax purposes. Generally, it is the value of the stock when it is earned–when it vests–that determines the taxable income to the employee. If restricted stock does not vest for 5 years after the grant date (assuming the employee is still employed), then it is the value of the stock at the time of vesting–not at the time it was granted–that must be reported for income taxes and employment taxes. If the value of the company’s stock has grown over that 5-year period, the employee’s taxable income is greater at the vesting date than it would have been at the grant date. Section 83(b) Elections: Opting Out of the Earned-When-Vested Rule There are two ways companies and employees can get the benefit of the lower value at stock on the grant date. First, the company can issue stock to an employee without restrictions. However, companies are often unwilling to issue unrestricted stock to new employees, because they want to reward the employee for staying with the company over the vesting period. Second, the employee can make a special election to have the restricted stock treated as taxable income at the time it is granted. By making a Section 83(b) election, an employee can report to the IRS that they have received compensation in the form of restricted stock and the employee wants to include the value of that stock in his or her taxable income immediately. The Section 83(b) election is a decision to ignore the “risk of forfeiture” requirement. It’s possible that this is a bad idea for the employee–for instance if the value of the stock is higher at grant date than it will be at the vesting date. But most companies and employees are optimistic about the growth of their stock value over a period of time. In that case, the 83(b) election results in the employee’s recognizing less taxable income immediately. The Section 83(b) election is especially beneficial when the company is brand new. Before the company starts its operations–and for a undefined period of time after–the value of the company’s stock is zero. An employee who has been given restricted stock at a company’s inception can therefore choose–by making a Section 83(b) election–to immediately recognize income in the amount of the stock’s value at that time, zero. The Section 83(b) election must be made within 30 days after the grant date. The election is made by sending a letter to the IRS (certified mail is recommended), at the address where the employee’s income tax return is required to be mailed. The election letter must identify the employee (by name and Social Security Number), the company (by name), the number of restricted shares granted to the employee, and the grant date. The election letter must also briefly describe the restrictions on the shares, especially the risk of forfeiture. The Section 83(b) Problem for Non-Startup Companies What happens when a company that has been in business for a period of time–say, a year or longer–wants to give restricted stock to an employee? It is still possible for the employee to make a Section 83(b) election, and recognizing taxable income at the grant date may still be better than waiting to recognize the income at the vesting date. However, it may no longer be plausible to claim that the value of the company’s stock on the grant date is zero. These means that, even when the Section 83(b) election is made, the grant of the restricted tax is […]

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