A Guide to Section 83(b) Election for Startup Founders

For startup founders, Section 83(b) elections are certainly a topic of interest. Founders have likely heard they should file an 83(b) election, but what exactly is this, and is it mandatory? We’re here to demystify the details of the 83(b) election, including how it’s filed and the process of filing.

What is an 83(b) Election?

An 83(b) election is a provision under the internal revenue code or IRC. It applies to taxpayers receiving equity in exchange for work. Under 83(b) elections, the value of the entire stock is included in an individual’s gross income in the year of receipt.

The election gives startup founders and employees the option to pay taxes on their options, before they vest. It’s called an election because founders are electing, or choosing, to pay taxes early.

When do you use an 83(b) election?

For startup founders and early employees of the startup, it makes sense to complete an 83(b) election upon receipt of unvested shares. That is when the stock value is generally low, so the taxes will not be high.

How long do you have to make an 83(b) election?

An 83(b) election must be filed with the IRS with 30 days of the exercise. The election has to be made upon receipt of the actual shares of the stock, and not the option. Exercise first, election next.

If eligible individuals receive an early exercisable stock option, the 83(b) election can be made upon receipt of the exercised shares.

What if you forget to fill out an 83(b) election?

If individuals do not meet the 30-day deadline for an 83(b) election there may still be options. But, it is important to know, there is no way to extend that time period.

For new startups, consider cancelling the old stock grant and issuing a new one, or creating a new grant with a different vesting schedule or number of shares. It’s also possible to amend a stock grant so that the repurchase price is fair market value.

It is important to seek financial and legal advice before choosing these options

Are 83(b)s required if you have no vesting?

Elections do not apply to vested shares, only to stock that is not yet vested. Any stock that is not early exercisable will not qualify for 83(b).

According to the IRS, if vesting restrictions are imposed on previously purchased fully vested stock, stock is treated like it was purchased at the time of original purchase. Anything that is taxable as income is measured at the time of the original purchase of shares, so there is no need to file an election.

How is a section 83(b) election made?

An 83(b) election is made through filing with the IRS. Make three copies of the signed and completed election form and one copy of the IRS cover letter. You will send the original form and letter, a copy of the cover letter, and a self-addressed stamped envelope to the IRS.

The center to send it to is the one where you would normally file your tax return. Sending the paperwork via certified mail is highly recommended.

Deliver a copy of the election form to the company. You may need to attach another copy to your income tax returns depending on your location. Keep another copy for your own records.

Who Uses an 83(b) Election?

Who files an 83(b) election?

The person who receives restricted stock in compensation for their work is the one who makes the 83(b) election for themselves.

Should founders file an 83(b) election?

In most cases it’s a good idea for startup founders to make an 83(b) election. The stock value is usually low at the time it is purchased, which offers the potential for tax savings.

Can a partnership make an 83(b) election?

Each taxpayer must make his or her own 83(b) election.

What Should You Consider Before Doing an 83(b) Election?

What are the benefits of an 83(b) election?

The CARES Act removed some of the limitations around how far back recent tax years’ net operating losses could be applied to prior years. If your company had profitable years that were followed by years of loss, talk to your tax accountant to see if you have any remaining net operating losses that can now be applied to earlier years to receive a tax refund.

What are the risks of an 83(b) election?

The biggest risk is that share value may not appreciate, or even depreciate. Taxes are prepaid so individuals are out of pocket. An 83(b) election might also keep an employee around longer than they would like, waiting to see stock options.

What happens if a founder does not file an 83(b) election?

Not opting in with an 83(b) election means founders will incur tax liability on the value of vested shares, as they vest. If founders sell vested stock, the difference between the sale price and fair market value is treated as capital gain.

What are the Steps to Filing an 83(b) Election?

What is the best way to fill out an 83(b) form?

Using subscription revenue recognition, the up-front payment for a subscription service is usually attributed to a deferred revenue account or listing. Each subscription period comes about and the performance obligation is met. Then, that time frame’s portion of the up-front fee can transfer and be recorded to accrued or recognized revenue.

How to report income from an 83(b) election

Depending on your state of residence you may need to file a copy of the 83(b) election with your income tax return. However, in most cases the fair market value is already included in other forms like W-2, box 1 or 1099-MISC, box 7.

Does 83(b) election need to be attached to 1040?

Your 83(b) election form no longer needs to be attached to your form 1040.

Does your spouse need to sign 83(b) election?

Generally, a spouse only needs to sign the 83(b) election form if residing in a community property state.

Where you send an 83(b) election?

Your 83(b) election form should be sent to the IRS center where you would normally file your income taxes.

How do I know if the IRS received my 83(b) election?

It is strongly recommended to send your 83(b) form as certified mail. By including a self-addressed stamped envelope and a request that the IRS return forms with a date stamp, you can ideally confirm receipt.



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