This article is a follow-up to a previous one that introduced Section 83(b), a provision of the Internal Revenue Code that rescues individuals from having to pay unexpectedly high income taxes on shares of stock granted subject to vesting.
To begin, the most important thing anyone needs to know about making the election is that Section 83(b) is unforgiving in the extreme: An election not made on time is the same thing as not making the election at all. There are no exceptions.
(As an aside, because of the severe consequences of missing the filing deadline, I highly recommend to my client companies that they implement a system for obtaining from those to whom they grant restricted stock a written and signed acknowledgment of having been informed about the need to make an 83(b) election, if at all, within a short time period.)
So, how is this election actually made? Well, while the IRS is a forms-oriented agency, it does not have any special form for effecting an election under Section 83(b). Instead, in Publication 525, the IRS instructs taxpayers simply to prepare a “written statement” that contains the following information:
- Your name, address, and taxpayer identification number.
- A description of each property for which you are making the choice. (Example: “100 shares of ABC Company.”)
- The date or dates on which the property was transferred and the tax year for which you are making the choice.
- The nature of any restrictions on the property. (Example: “The shares are subject to a vesting restriction that lapses over time based on continuous service as an employee or consultant of the Company.”)
- The fair market value at the time of transfer (ignoring restrictions except those that will never lapse) of each property for which you are making the choice.
- Any amount that you paid for the property.
- A statement that you have provided copies to the appropriate persons.
The written statement must then be signed and dated, and filed within thirty days of the date of grant to whichever IRS Service Center that the taxpayer uses for filing annual returns. A copy of the written statement must also be provided to the company, and another copy must be attached to the taxpayer’s return for the taxable year in which the election is made.
I have seen a number of different versions of an 83(b) election, but they all include the information listed above, in one form or another.