IRS Introduces a Fillable Form to Make 83(b) Election

Dhruv Panchal

CPA | Tax Supervisor

The IRS released an official form for electing IRC § 83(b). This election has been around for quite some time. For many recipients, it is a tax advantageous election for unvested restricted stock received. No substantive change has been made to the law under IRC § 83(b). However, the IRS released Form 15620 which gives the transferor another way to elect 83(b).

What is an 83(b) election?

This election merely advances a taxable event to when unvested property is received. When filed timely by the transferor, it allows tax to be assessed at the grant date instead of the vesting date. Many times, this is used for startup companies with a low value; therefore, the taxation upon an 83(b) election is limited. The election also starts the clock for determining the holding period upon sale. When the stock vests, there is no tax paid as the compensation income was recognized upon the 83(b) election date. Once sold, you pay capital gains on the difference of sale price and the value of the stock when the compensation was recognized.

If no election is made, then you won’t pay taxes until the restricted stock vests. The risk with this is if the value at vesting is higher than grant, you will be paying ordinary rates on this compensation income at fair market value. This is a big cash flow issue for taxpayers, as tax is due even if the stock is not sold.    

What the 83(b) election allows is the flexibility to pay ordinary tax at grant date, where value would be usually lower. Accelerating the income also provides for a higher chance of getting beneficial long-term capital gains rates. However, the downside to the election is if you have paid tax early and the value of the stock drops, then this will not result in a tax benefit.     

Example

Let’s say you receive $1,000 worth of restricted stock with vesting in Year 3. If the 83(b) election is filed timely, then you would pay ordinary income tax on $1,000 of compensation in the year you received restricted stock. If ordinary rates are 37% at the highest bracket, you would pay $370. In Year 3, when stock vests at $20,000, there is no tax liability. If you decide to sell In Year 5 when the stock is $25,000, then you will pay capital gains tax on the difference between sale price and grant price which would be $24,000. Capital gains at 20% would translate to $4,800 tax due in Year 5. 
Total taxes paid on this restricted block would be $5,170 ($370 + $4,800).

If we assume the same facts as above, but no 83(b) election was made, then you would have no tax due at grant date (Year 1). However, when stock vests in Year 3, you would be liable for $7,400 (ordinary rate of 37% times vesting amount of $20,000). And if you keep the stock until Year 5 and then sell it, the capital gain would be $5,000 (difference between vesting and sale price). Tax due at 20% would be $1,000.   
Total taxes paid on this restricted block would be $8,400 ($7,400 + $1,000).

Takeaway

The IRC § 83(b)election has not changed. The IRS merely released a Form to make the election If you expect to receive nonvested property in connection with performance of services, and you believe the 83(b) election to be beneficial to you, it is imperative that the 83(b) election is made within 30 days as there is no late filing relief.  

As this election can be murky, Cray Kaiser is here to help you navigate potential pitfalls and opportunities. Please call us today at 630-953-4900.

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