(1) What is an 83b election? and
(2) How do I file it?
What is an 83b Election?
Simply put, an 83b election is a letter that a shareholder files with the IRS to preserve the option to be taxed for the entire amount of stock that is subject to vesting at the present value, which may be fairly nominal. Therefore, the shareholder pays tax on the shares when first received, but not when the shares vest. This election must be done within thiryt (30) days of first obtaining the stock by way of a Restricted Stock Agreement.
This is helpful for the shareholder because the fair market value of the stock at the time of receipt might be nominal, as in the usual case where the startup just incorporated and is issuing stock to founders and early stage hires. At this point, the tax might be insignificant, and an election will avoid a potentially much higher tax bill later. Absent filing an 83b election, should the startup raises funds and become highly profitable, the value of the shares will increase substantially and when the shares vest, the tax on the fair market value of the property at that time may be more than the shareholder will be able to afford.
The startup company should ideally inform all of the shareholders, to whom it issues restricted stock subject to vesting, to timely file their 83b elections after receipt of the shares.
Conversely, a shareholder does not need to file an 83b election if s/he receives shares are not subject to vesting. If his or her shares are fully vested, no Section 83(b) election is required.
How do I file an 83b Election?
As a part of our incorporation services, our law firm files 83b elections quite frequently. Within thirty (30) days after the shares are sold, we mail (via certified mail) a cover letter and two copies of the original election form signed by the shareholder to the Internal Revenue Service (“IRS”) Center where the particular shareholder would otherwise file his or her tax return. We include a self-addressed envelope so that the IRS can mail us the filed and stamped copy of the 83b election, copies of which we then provide to the shareholder and the company.
The IRS provides thorough instructions as to how to file and ensure that 83b elections are given effect. You can click here to learn more.
Smith Shapourian & Mignano, PC is available to answer any questions or concerns you may have regarding 83(b) elections. You may contact us for a consultation.
This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.