While many startup companies give stock options to employees, others give restricted stock to its founders and some employees. “Restricted stock” is stock that is granted to a stockholder, but that is restricted because it cannot be transferred or sold by that stockholder and may even be taken back by the company until certain conditions are met. When the conditions are met, the stock is released from the restrictions, and the stock is said to be “vested.”
If you are granted restricted stock, filing an 83(b) election might save you money on taxes, so it is useful to know how these elections work and when they may be useful. The steps required to file an 83(b) election are relatively simple, and a list is outlined below explaining the process.
In short, an 83(b) election is a letter sent to the IRS within 30 days of the date restricted stock is granted to you to let the IRS know that you want the stock to be taxed on the date it was granted. Otherwise, you will pay taxes on the date the stock vests, which may mean that you pay more taxes.
Why
An 83(b) election may be filed when you have been granted restricted stock, and the stock is vesting to you over time. By filing an 83(b) election, you elect to pay income taxes on all the stock you have been granted on the date it is granted. Without the 83(b) election, you would pay income taxes on the stock over time as it vests, and if the stock increases in value over time, you pay more taxes than you would have on the date the stock was granted when the stock had less value. If you file an 83(b) election, and the stock increases in value over time, you pay less taxes because the taxes you pay are based on the stock’s lower value from the date it was granted to you.
However, 83(b) elections may not be advantageous in every scenario. When deciding whether to file an 83(b) election, be sure to consider the following:
- Does my granted stock have restrictions? If the stock is not vesting to you over time, there is no reason to file an 83(b) election.
- Will the value of the granted stock increase over time? The 83(b) election cannot be reversed. If the value of the stock decreases over time, you will have already paid taxes on all the stock at its highest price rather than later when the value has dropped. You will pay more taxes than if you had not filed the election.
- Will I remain with the granting company for the entire vesting period? When you file an 83(b) election, you pay taxes on all the stock that will potentially vest. If you leave the company before all the stock vests, you will have paid taxes on all the stock even though you will not be able to sell or transfer all of the stock.
- During the year of the stock grant, will you be able to pay the income taxes on the all the granted stock? The stock valuation is included in your income even though it is not really cash in your bank account. You need to have the cash available to pay the taxes on the granted stock the year it is granted if you choose to file an 83(b) election.
How
If you decide to file an 83(b) election, an outline of the basic steps are as follows:
- Paperwork. If your lawyer or trusted service provider has provided you with 83(b) election forms, you may use those. If not, find the 83(b) Election IRS forms online and print and fill out four copies. The form requires some personal information and information regarding the stock grant transaction.
- Send your paperwork to the IRS. Search the IRS website to find out where to send the forms in your state. Within 30 days of the stock being granted to you, and using U.S. Certified Mail to prove timely delivery, send the IRS two copies of the completed 83(b) forms, a return self-addressed envelope with stamps, and a cover letter (a signed description of the documents you have sent). The IRS will keep one copy of the 83(b) form for its own records, and with the return envelope, will send you back a stamped copy of the 83(b) form for you to keep for your records.
- Record your other copies. Record one of the additional two copies of the completed 83(b) forms with your company and keep the other yourself for your personal records. Should something go wrong, additional copies should be easily accessible to help correct the issue.
This post lays out the basic outline of the steps required for filing an 83(b) election, but complications may arise or details may change. Please note that this post (1) is not provided in the course of and does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal or tax advice from qualified professionals.