To provide some simple tax background, there are different types of tax rates. Because the United States uses graduated tax rates meaning the rates vary based on your income , you may actually be subject to lower rates, but in each case the long-term capital gains rate will be lower than the ordinary income tax rate. Assuming you paid nothing for your restricted stock, you will be taxed on the value of your restricted stock as determined at grant if a Section 83 b election is filed , or at vesting if no Section 83 b election is filed , in each case at the applicable ordinary income tax rate.
Because the long-term capital gains rate will be lower, the goal here is to get as much of your gain as possible taxed using that rate, rather than the ordinary income tax rate. For simplicity, we will not discuss employment tax or state tax consequences. Because you filed a Section 83 b election, you do not have to pay tax when the stock vests, only on the sale.
Your economic gain after tax? In this example you do not file a Section 83 b election. Filing a Section 83 b election also has two other benefits. For more information on qualified small business stock, please see this article. Filing a tax code Section 83 b election would immediately cause you tens of thousands of dollars of tax. And if the company subsequently fails, and in particular if it fails before your stock vests, you likely would have been economically better off to not have filed a Section 83 b election.
Bottom line — discuss with your individual tax advisor, but remember that the filing must be made if at all within 30 days after the grant date of your restricted stock, as that is an absolute deadline that cannot be cured. The default tax rule under Sec.
If the company experiences dramatic growth, the taxes incurred upon vesting may be dramatic as well. Contrast this with what happens if a Sec. Then, instead of applying the default tax rule, the recipient is taxed at the time of the grant at its value at that time. While the recipient of the stock will probably be the one most distraught over the tax consequences resulting from missing a Sec.
The company will need to decide on a value for newly vested stock at every vesting date and will need to properly report that amount as compensation. However, on the bright side, the company can generally take a deduction for that amount. Particularly for stock in early-stage startup companies that have low valuations, the choice to make the election is a no-brainer.
However, it is one of those tasks easily overlooked in the excitement and bustle of starting a company or closing on an investment, and there is generally only a day window during which to notify the IRS of the election. As noted above, however, there is hope for a taxpayer who has missed making a Sec. First, if an employee thinks he or she is late in making the election, make sure the stock was really issued and the day window has passed.
Read the grant agreement carefully — sometimes a grant is conditioned on an event that did not occur or that did not occur until later than intended. Your 83 b election form should be sent to the IRS center where you would normally file your income taxes. For startup founders, Section 83 b elections are certainly a topic of interest. Founders have likely heard they should file an 83 b election, but what exactly is this, and is it mandatory?
What is an 83 b Election? When do you use an 83 b election? How long do you have to make an 83 b election? An 83 b election must be filed with the IRS with 30 days of the exercise. The election has to be made upon receipt of the actual shares of the stock, and not the option. Exercise first, election next. If eligible individuals receive an early exercisable stock option, the 83 b election can be made upon receipt of the exercised shares.
What if you forget to fill out an 83 b election? If individuals do not meet the day deadline for an 83 b election there may still be options.
But, it is important to know, there is no way to extend that time period. For new startups, consider cancelling the old stock grant and issuing a new one, or creating a new grant with a different vesting schedule or number of shares. It is important to seek financial and legal advice before choosing these options. Are 83 b s required if you have no vesting? How is a section 83 b election made? Who Uses an 83 b Election?
Who files an 83 b election? The person who receives restricted stock in compensation for their work is the one who makes the 83 b election for themselves. Should founders file an 83 b election? The stock value is usually low at the time it is purchased, which offers the potential for tax savings. Can a partnership make an 83 b election?
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