Employment, Equity Incentives, Formation Issues

Changes Made To Section 83(b) Election With Electronic Tax Returns In Mind

The Section 83(b) election is popular among startup founders and employees, as it can sometimes save them from a huge tax bill...

Written by Amit Singh · 1 min read >

The Section 83(b) election is popular among startup founders and employees, as it can sometimes save them from a huge tax bill later down the road. Historically though, people who use the election haven’t been able to file their tax returns online, thanks to a requirement that a copy of the tax election by attached to the taxpayer’s return for the year of election. That has changed with new regulations from the Internal Revenue Service and Department of Treasury.

What is a Section 83(b) election?

Section 83(b) of the Internal Revenue Code applies to various forms of deferred compensation, including equity compensation such as stock grants that are subject to vesting (this is often referred to as restricted stock). Under the tax code, there is normally no taxable event when someone – like a startup employee, for instance – receives unvested stock or other property in exchange for services. Instead, the recipient is taxed on the difference between the purchase price of the stock and the fair market value of the stock at the time it is vested.

The Section 83(b) election basically lets the IRS know that you want to be taxed on the stock on the date it was issued, rather than as the stock vests. For founders and employees who receive restricted stock worth a nominal amount, it almost always makes sense to file an election and avoid a potentially much higher tax bill later.  

Regulation Change

On July 25, the IRS and Treasury Department published final regulations that eliminate the requirement that taxpayers submit a copy of the Section 83(b) election with their tax return for the year in which the equity was transferred. The new rule applies to elections made with respect to property transferred on or after Jan. 1, 2015. As described in the regulation, the change comes in response to the number of people that file their individual tax returns electronically.

The regulations don’t change the other requirements of the Section 83(b) election, including that the election be must be filed with the IRS within 30 days from the date the property is transferred to the individual. The person must also still provide a copy of the election to the service recipient (typically the employer).

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