What is the 83(b) election?

Officially, per the AICPA, the default tax rule under Sec. 83 for stock subject to vesting is that no income has to be recognized upon grant but rather will be recognized when the stock vests, at the value at the time of vesting.

Unofficially?

An 83(b) election is one of the most tax-saving elections for startup founders when granted options or receiving equity compensation.

We’re going to break down everything you need to know about the election in today’s blog.

(And anything we don’t answer, we’ll be happy to chat about in a quick call!)

Let’s dive in.

How does the 83(b) election work?

Put simply:

When you are granted stock compensation within a company, you technically don’t own them until they fully vest.

And the common vest period is usually over 4 years.

The goal of an 83(b) election is to avoid paying ordinary income taxes at the time when options are fully vested (~4 years later), when the value is higher, but rather pay taxes at the initial price of when the stock was worth pennies.

What stock qualifies for 83(b) election?

Not every stock qualifies for the 83(b) tax election.

Here are the ones that do:

• Non Statutory Option (NSO): employee stock options that defer taxes until the options are exercised
• Incentive Stock Options (ISO): a corporate benefit that gives an employee the right to buy shares of company stock at a discounted price with the added benefit of possible tax breaks on the profit.
• Restricted Stock Awards (RSA): a grant of company stock in which the recipient’s rights in the stock are restricted until the shares vest (different than RSU’s available in public companies)

When should you file?

It’s critical that you make the election within 30 days of the restricted stock grant date, not vesting date.

No extension or exemption will be granted by the IRS.

Is the 83(b) election worth doing?

We strongly recommend that you file the election If you believe in the company, see the potential, and are planning to stick with the company for more than one year until your options are vested or partially vested.

However, if you think the company will go out of business soon, or it’ll not make it to IPO, then don’t waste your money.

How do I physically file the 83(b) election?

Complete the 83 (b) election using this form within 30 days of the grant date (very crucial).

Then, send two copies to the IRS with a pre-stamped and self-addressed return envelope via certified mail – one copy goes to your employer, and you can retain the other copy for your records.

What if I need extra help?

As experienced start up accountants, we’re always here to help. Simply book a 15-minute call using our easy calendar and we’ll be happy to answer any questions you have.

Until next time!