83(b) Election May Be Beneficial for Stock Subject to Vesting

AAFCPAs would like to make clients aware of the 83(b) election, a beneficial tax treatment that may provide significant tax savings.  An 83(b) election may work favorably for you if you have been given restricted property, such as equity.  Under IRS code section 83(b), you are able to convert what would normally be ordinary income for this equity earned for services into capital gain income.
Often times a taxpayer may receive restricted property (in most cases stock, which we will focus on herein) in exchange for the services they perform.  Once the restrictions are lifted, he or she will recognize ordinary income equal to the properties fair market value at that time.  Under 83(b), the taxpayer is provided the opportunity to elect to be taxed on the value of the restricted stock in the year he/she receives it instead of the year when the restrictions lift.
By making a Section 83(b) election, you are able to report at the transfer date (regardless of restrictions) the ordinary income, which is determined as the excess of Fair Market Value over the amount paid for the property.  In this case, any additional appreciation once the restrictions lapse and the property is sold, you are able to take advantage of the favorable capital gain treatment on that property.
When is it advisable to consider an 83(b) Election?
Generally speaking, an 83(b) election is worth considering when you believe the restricted stock will appreciate in value over the restriction period and you anticipate remaining with the issuer/employer up through the time when the applicable restrictions lapse.  It is especially helpful if the fair market value of the stock is nominal at the time you receive it.  In this case, the 83(b) election will allow you to avoid a potentially much higher tax when the restriction lapses.
What are the risks of making an 83(b) Election?
An 83(b) election can prove detrimental if the restricted property is forfeited. One common example is that of leaving the company before the restrictions lapse.  When the property is forfeited, a capital loss is allowed for any amount that is paid by the taxpayer, plus the amount of ordinary income recognized with respect to the forfeited property.  A similar risk occurs when the company proves to be unsuccessful in its business ventures, leaving those individuals who made the 83(b) election with a capital loss.
Time is of the essence…
The 83(b) election must be made within 30 days of the property transfer.  The election is made by filing a signed statement with the IRS Service Center where your return is filed.  This process is frequently, but not always, managed in conjunction with corporate counsel.
AAFCPAs wants you to take full advantage of all available tax benefits to assure you are optimizing your tax liability, while also recognizing and managing the related risks. If you have any questions about tax planning or compliance with respect to these issues, please contact your AAFCPAs partner or Richard Weiner at 774.512.4078 or rweiner@nullaafcpa.com.

About the Authors

Daniel Seaman
Dan is a leader in AAFCPAs’ Tax Practice advising select clients, including high-net-worth individuals along with their families and business interests. He works extensively with AAF Wealth Management clients, helping to ensure the seamless execution of their holistic financial plans. He navigates the intricacies of compliance, taxation, wealth optimization, asset protection & privacy. Since joining the firm in 2007, Dan has embraced AAFCPAs’ integrated service model as key to client success. He recognizes that this combination of tax and wealth management expertise leads to better-informed decisions, increased tax efficiency, and an enhanced client experience—all contributing to greater success in achieving a clients' financial goals.
Rich has over 30 years of broad tax experience with a specialty in tax planning and consulting for private and publicly-held businesses. Rich has specific expertise in the Software, Bio-Technology, Medical Device, Life Science, Manufacturing, Retail, Professional Service and Publishing industries, as well as U.S. aspects of international taxation. He works extensively with European companies expanding into the U.S. market. Additional areas of focus include companies and stockholders in transition, including structuring of and planning for Mergers & Acquisitions, planning for changes in ownership and management, and adoption of tax methodologies with a view toward the long term. He is well known in his field and is a frequent speaker on a variety of tax related topics.

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