Benefits of 83(b) Elections

When you are the founder or an employee of a company who is entitled to a certain number of shares of the company, you may know or have a feeling as to how well the value of these shares may rise in the future. In such cases, you may want to save on your taxation liabilities as the market value of your shares increases. The more your share values go up, the more profits you receive, and subsequently, you will be taxed for the income you receive. This is where provisions like 83(b) election come into the picture and save you from overspending on taxes.

83(b) election is a section under IRC (Internal Revenue Code), that allows you to pay taxes for the total market value of your restricted stocks according to the time it is granted and not vested.

The restricted stock (different from Restricted Stock Units), when granted, may have a certain value. This value may increase as your company performs well in the future and you may have acquired more shares following a vesting schedule. But then, you may be required to pay taxes based on the current market value. However, filing 83(b) election in 30 days from the grant date will let you be taxed on the market value at the time of granting.

How to file the 83(b) election form?

To avail of the benefits of the 83(b) election form, you must file within 30 days after the restricted stocks are granted. If you fail to do so, you will be taxed according to your vesting schedule and the market value after. Remember, filing the form is an irreversible process. So a lot of caution must go into the planning.

Firstly, you must secure an 83(b) election form from the Internal Revenue Service center and fill them with the required data. The information includes your Identity proof, name, social security number, and address. The details of the shares you received, for example, the number of shares, grant date, vesting schedule, the fair market rate of the shares when granted, restrictions associated with the shares, if any, the price you paid for the shares and gross income are important to file the form. You must forward a copy of the form to your employer and mail it to the IRS center.

Tip — It is recommended to secure the time and date of the application for future reference.

Example of 83(b) Election Form Use

Let us assume John is the co-founder of ABC Inc. and has 10,000 shares of restricted stocks at $1/share value. He expects the value to rise to $4 after a year and $8 in two years. By the time he completes his vesting schedule in four years, he expects the value to be $16/share. In the first 12 months, the value of his 2,500 shares would be $10,000 ($4×2,500), the second year his share value would be ($8× 5,000) $40,000 and after four years of vesting his total share value would be ($16×10,000) $160,000. Instead of paying income tax on his total gain or capital gains tax on the profits made at $16/share value, he can pay tax early, considering the $1/share value for 10,000 shares, if he files an 83(b) election form.

Benefits of 83(b) Election Form

An 83(b) election form can be highly beneficial if you are sure that your company has the potential to increase in value in the future.

• The founder or employee will never have to consider repurchasing the shares.
• You do not have to always calculate the current value of your shares and the taxes you need to pay accordingly.
• There is no burden on the startup to consider tax obligations related to vesting shares.
• Instead of paying taxes according to your shares vesting, paying them all at once can have long-term financial benefits.
• As employers, when your employees have such financial privileges, you can see them reflecting on their productivity and performance.
• From a founder or employer’s perspective, you can have one less issue to worry about and focus on delivering quality business to clients.

Things to consider before filing an 83(b) election form

Though 83(b) application has more benefits to taxpayers, there are a few cases when the firm may make no sense. Consider the following cases before you prepay your tax.

If your company values do not look promising, consider waiting to see how your shares vest. This can help you avoid overpaying taxes for no gains.

If you do not see yourself sticking to the company for the long term, paying all your taxes in advance is no longer possible. So it is crucial to take enough time to reflect on how long you wish to be associated with the company. There is no need to file 83(b) election for fully vested shares at the time of granting. 83(b) election form is irrevocable after you file.

Summing up

Filing an 83 (b) form is certainly a good option for companies with huge potential to increase value in the market. Apart from saving money on tax, you save time that you may periodically invest worrying over tax calculation. It is also highly recommended to seek the assistance of a professional service provider before you start your filing process. At Eqvista, we have a panel of expert consultants who can guide you along your startup journey and offer timely clarifications. If you have queries regarding taxation, 83(b) election form, or anything business, feel free to contact us.