File 83(b) Election

The 83(b) election is an Internal Revenue Code (IRC) provision that gives an employee or founder of a startup the ability to pay taxes on the complete fair market value of the restricted stock at the point of granting rather than its vests. The 83(b) election provides a strategic tax planning opportunity for those involved in startups or receiving restricted stock.

83(b) Election

By making an 83(b) election, you are requesting that the IRS recognize income and apply income taxes to the acquisition of company stock when it vests and not later at the time of acquisition. The grant date is when an employee receives a company stock or stock option.

IRS Form 15620 was introduced on November 7, 2024, to standardize the process for making a Section 83(b) election. Form 15620 is expected to streamline the filing process and provide taxpayers with greater certainty regarding their compliance with IRS requirements.

When should I file 83(b) Election?

To file the 83(b) election when you receive restricted stock or stock options, not when you actually vest. The timeframe to file the 83(b) election is within 30 days of the grant date. In the case of failing to file the 83(b) election, you will be required to pay taxes on the value of the stock at vesting. You must remember that the process is irrevocable crucial to consult with a tax professional to ensure proper filing and understand your specific situation’s implications.

Example of 83(b) Election Filing Timeline

The 30-day timeframe for filing an 83(b) election is crucial for individuals receiving equity, such as restricted stock or stock options that are subject to vesting. Here is a scenario emphasizes the importance of understanding and utilizing the 83(b) election within the 30-day period to effectively minimize tax liabilities.

An employee receives a grant of 1,000 shares of restricted stock as part of their compensation package.

• Grant Date: January 1, 2025
• FMV on Grant Date: $10 per share
• Total Value of Shares: 1,000 shares x $10 = $10,000
• Vesting Schedule: 25% vests each year (250 shares per year)

File an 83(b) Election

The Employee learns about the 83(b) election and decides to file it. By making this election, the Employee can recognize the income on the total value of the shares ($10,000) at the time of the grant rather than when the shares vest.

Filing the Election

The Employee must file their 83(b) election with the IRS within 30 days of January 1, 2025. This means they have until January 31, 2025, to submit their election. On January 30, 2025, the employee will mail their completed election statement to the IRS via certified mail.

Tax Implications

By filing the election:

• The Employee recognizes $10,000 in income for the tax year 2025.
• They pay taxes on this amount at their ordinary income tax rate.

If the Employee had not filed the election by January 31, 2025:

• They would not have been able to recognize this income upfront.
• Instead, they would pay taxes on each portion (250 shares) as they vest over the next four years. If the FMV increases significantly by then (e.g., to $50 per share), they would pay taxes on a much higher amount when each portion vests.

Benefits of 83(b) Election

An 83(b) election can be beneficial for both employees and employers. Filing 83(b) will possibly reduce the tax burden initially, especially if there is an increase in value of restricted stock and stock options in coming years. It can minimize tax liability if the amount of income reported is small at the time of granting.

Filing an 83(b) election makes sense if the value of the restricted stock is expected to increase in the future. In simple terms, an 83(b) election can lead to tax savings if it is done under the right circumstances.

Filing 83(b) Election Process

By following a few 83(b) filing instructions, it will be much easier. Given below are the steps to be followed:

• Taxpayers can either use IRS Form 15620 or create their own statement that includes all necessary information. This statement must include specific information such as the taxpayer’s details, a description of the property, and its fair market value at the time of grant.
• You should mail the completed letter to the IRS within 30 days of your grant date, ideally via certified mail for proof of timely filing.
• You must mail a copy of the completed letter to your employer.

Note: It’s important to inquire about the appropriate IRS address for filing the 83(b) Election, as it may vary depending on the location.

Consequences of not filing 83(b) Election

Failing to file Section 83(b) election within 30 days may result in adverse tax implications. Tax liabilities are assessed based on the difference between the fair market value of an individual’s vested stock and the purchase price. This discrepancy often results in higher tax assessments and if the stock’s value increases from the granting date to the vesting date, the recipient may encounter a larger tax obligation.

Eqvista Makes it Easier to file 83(b) Election

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Besides, Our team of certified experts will provide you with proficient support through guidance, assistance, and other relevant help to eliminate the stress and difficulties of filing an 83(b) election. Get started today and secure your financial future by filing your 83(b) election with Eqvista!