How do I make a timely and complete Section 83(b) election?

Reports issued by the compensation committee and presented to the board of directors should be requested because they may provide insight into any equity-based compensation. Can that be done through e-filing? By Amanda May 15, - 8: The Summary Compensation Table is then followed by other tables and disclosures containing more specific information on the components of compensation for the last completed year. Notably, though, no deduction is allowed for the amount the employee previously included in income by making the 83 b election. The excess of the FMV of the share on the date of its disposition over the amount paid for the share, or.

The 83(b) election is a provision under the Internal Revenue Code (IRC) which gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting.


Stock substantially vests when it is either transferable or is no longer subject to a substantial risk of forfeiture. The amount of taxable income is the fair market value of the stock at the time it substantially vests , less any amount the employee pays for the stock. The fair market value of the stock is determined without regard to restrictions, except for restrictions that will never lapse so-called "nonlapse" restrictions.

The Effect of 83 b Elections Most tax professionals know what an 83 b election is, even if they have never made one. When an employee makes an election under Section 83 b , he sets aside the income deferral rules that apply while stock is non-vested.

Section 83 b allows an employee to elect to currently include in income the fair market value of the stock, less any amount paid for it, at the time stock is issued even though not substantially vested. Of course, the election is not available if stock is already substantially vested and hence immediately includible without regard to an election. In short, the employee elects to incur tax on the value of the stock currently, rather than waiting until it vests.

When an 83 b election is made, an employee includes the fair market value of the stock after taking into account any nonlapse restrictions, but without regard to any lapse restrictions those restrictions that will lapse. He does not recognize any income at all when the stock substantially vests.

Instead, any appreciation or depreciation after the date of the election is taxable as a capital gain or loss when the employee sells the stock. The holding period also is effected, beginning on the day after the day the property is transferred to the employee.

Forfeitures What happens if an employee who makes an election leaves his job before the stock substantially vests? In that case, the employee forfeits his stock and is allowed a limited loss deduction. The amount of the deduction on forfeiture is limited to the amount paid for the stock, less the amount realized on the forfeiture if any. Notably, though, no deduction is allowed for the amount the employee previously included in income by making the 83 b election.

The employer is also effected by a forfeiture. The employer must include in income on the date of the forfeiture the lesser of the fair market value of the stock or the amount of the deduction that it took when the employee made the election. What's an Employee to Do? Do employees receiving restricted stock want to make these elections? Obviously, both the timing of the tax to the employee and the character of income as ordinary or capital can be effected.

With most restricted property, Section 83 provides that income in includible at the time the restrictions lapse. If an employee makes an 83 b election, in contrast, he will recognize immediate income at the time of the election, but he will not recognize income when the stock substantially vests.

As to character, all appreciation from the time of an 83 b election is capital gain. If no election were made, in contrast, ordinary income arises when the stock vests which causes his tax basis in the stock to increase. Only the difference between the value at that time and the amount realized on an eventual sale date would be capital gain.

So why would an employee want to accelerate income? In essence, the employee is betting that the stock will appreciate, and so he is limiting the amount of compensation income he will recognize as a result of the stock grant. Optimistic employees may have lots of reasons for making an 83 b election, although the current economic doldrums make 83 b elections a little less attractive than they once were. Of course, an 83 b election is not risk free: Not surprisingly, a good deal of Section 83 lore relates to how one determines value.

As we've noted in these pages before, an important decision nearly 20 years ago emphasized that Section 83 b elections can be made reporting zero value. ISOs are generally beyond the reach of Section In each of the five vested years, he will have to pay tax on the fair market value of the , shares vested. If at a later time, all the shares sell for a profit, the co-founder will be subject to a capital gains tax on his gain from the proceeds of the sale.

The 83 b election gives the co-founder the option to pay taxes on the equity upfront before the vesting period starts. The 83 b election notifies the IRS that the elector has opted to report the difference between the amount paid for the stock and the fair market value of the stock as taxable income.

However, if he sells the shares for a profit, a capital gains tax will be applied. The 83 b election makes the most sense when the elector is sure that the value of the shares is going to increase over the coming years. Also, if the amount of income reported is small at the time of granting, an 83 b election might be beneficial. In a reverse scenario where the 83 b election was triggered, and the equity value falls or the company files for bankruptcy, then the taxpayer overpaid in taxes for shares with a lesser or worthless amount.

Unfortunately, the IRS does not allow an overpayment claim of taxes under the 83 b election. Since the vested stock proceeds to decline over a 4-year vesting period, they would have been better off without the 83 b election, paying an annual tax on the reduced value of the vested equity for each of the four years, assuming the decline is significant. Another instance where an 83 b election would turn out to be a disadvantage will be if the employee leaves the firm before the vesting period is over.

In this case, they would have paid taxes on shares that would never be received. Also, if the amount of reported income is substantial at the time a stock granting, filing for an 83 b election will not make much sense. In addition to notifying the IRS of the election, the recipient of the equity must also submit a copy of the completed election form to their employer and include a copy with their annual tax return.

A financial incentive granted to employees who have met the required Having a financial plan that includes restricted stock will help you to avoid paying higher taxes.

BREAKING DOWN '83(b) Election'

You Can’t Make An 83(b) Election With Respect To A Stock Option. It is a common misconception, but a Section 83(b) election generally cannot be made with respect to the receipt of a private company stock option. So, the 83(b) election applies when you have stock vesting on a schedule, but not when you have options vesting on a schedule. As a general matter, option grants and 83(b) elections have nothing to do with each other. First, a few basics: If you have stock options, you do not need to file an 83(b) Election Form, unless you exercised the option early. If you purchased/received founder’s stock and there are no restrictions, such as vesting, you do not need to file an.