Are you fortunate enough to have your personal and professional efforts result in a successful company IPO?
Consider making an election under Section 83(b) of the Internal Revenue Code if you receive restricted stock (RS) or options that allow you to exercise them before they vest!
What is an 83(b) Election?
When you make an 83(b) election with regard to RS or options you receive, you decide to include the value of RS or the spread of the options in your taxable income in the year you make the election as opposed to later when the RS vests or when you exercise your options after they have vested, at which point the value and resulting tax liability may change. The stock must be subject to a significant risk of forfeiture prior to vesting in order to be eligible for the election (e.g., you would lose the stock if you left the company before it vested).
When Should You Consider Making an 83(b) Election?
Take into account making an 83(b) election if…
– You are given the option to take either I RS with a low market value per share at the time of grant or (ii) options with a strike price that is nearly or exactly equal to the market value per share.
– You have the financial means to cover all election-related expenses (you will have to pay the strike price for options, and any income tax generated by making the election for both RS and options)
– You think the stock price of the company will rise significantly over time.
– The likelihood that you will lose the stock is low (you don’t anticipate leaving the company and losing the stock as a result).
– You think you can sell your stock at a higher price down the road.
When Should You Make the Election?
The election must be submitted for RS within 30 days of receiving the RS.
The election must be made for options within 30 days of exercise. Make sure you can exercise your company’s plan’s options before they vested.
What Happens When You Make the Election?
When you make an 83(b) election, you include the RS or option spread in your taxable income. Without an 83(b) election, the full value of the RS is included in your income when they vest, and the option spread is taxable at exercise, presumably when the stock price is higher.
How to File an 83b Election
The 83b election process is simple, but there are pros and cons to consider.
Step 1: The employee completes and signs IRS Form 83b, which includes these details:
– Identifiers (name, address, Social Security number).
– Include the date received or purchased, the description of the property awarded, shares restrictions, and fair market value.
– The price of shares.
– The employee’s gross income.
Step 2: The employee sends their election letter or form to their employer and the IRS Service Center.
Unsure if 83b matches your needs? Credo’s tax advisor can help you decide if it’s worth proceeding.
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