An 83(b) is one of many tax-related forms entrepreneurs and small business owners use. Taking advantage of the IRS 83(b) election can help minimize your tax outlay. The form is relatively straightforward if you know what needs to be included.
Incfile’s customizable 83(b) Election Form template will help simplify it all for you, so you’ll be able to send it off to the Internal Revenue Service (IRS) in no time.
What Is an 83(b) Election Form?
An 83(b) election form is sent to the IRS and informs them that you’d like to be taxed on your equity on the date it was granted to you instead of the date it vests. The grant date is considered to be when you received the company stock, while vesting means that you have gained ownership of the share or stock, which is usually achieved after a certain period of time.
The form and related documents must be sent to the IRS within 30 days after the issuing of restricted shares or stock.
The form effectively indicates that you wish to pre-pay your tax liability. Then, if and when you decide to sell the shares for profit or gain in the future, you’d only be liable for capital gains taxes instead of the much higher income tax rate. This is how the form can minimize your tax outlay, if it’s right for you.
Who Should File an 83(b) Election Form?
The 83(b) election form is generally used by both startup founders and entrepreneurs and some employees of companies who have been rewarded with restricted stock. The form is applicable only for restricted stock that is subject to vesting, not fully vested stock, which is taxed at the time of the grant.
It’s common for company founders to be compensated with restricted stock, which are shares that are subject to conditions such as vesting or forfeiture (leaving the company resulting in loss of shares). The benefit of restricted stock is that it could significantly increase in value over time (at least, you hope) and it allows you to shift your tax code to capital gains tax instead of income tax.
Pros and Cons of Filing an 83(b) Election Form
While filing an 83(b) election form is generally considered a positive step in saving on taxes, there are some significant pros and cons to think about.
- It allows you to pre-pay your tax liability at the time of granting as opposed to at the time of vesting.
- The form is especially helpful if the restricted stock’s value increases over time.
- You would then get to pay the long-term capital gains tax, which is lower than the personal income tax.
- If the value of the restricted stock falls or the company files for bankruptcy, then you may have overpaid your taxes.
- The IRS does not offer overpayment claim of taxes on any restricted stock filed under an 83(b) election form.
- If you decide to leave the company before the vesting period is over, then you would have paid taxes on shares that you will never receive.
How to File a Section 83(b) Election Form
Complete Incfile’s customizable 83(b) election form template.
Make multiple copies of your completed form and IRS cover letter.
Send the original and signed election form and cover letter with a self-addressed return envelope to the IRS.
Give another copy of the form to your company or employee.
You may have to attach a copy of the form to your state personal income tax (this will depend on your state laws).
Keep a record of the form for your own personal file.
Explore More Business Resources
Filing an 83(b) election form can be beneficial if you’re compensated with restricted stock. It’s a straightforward form to fill out and can potentially lower your tax liability in the long term. Peruse more of Incfile’s Business Resources & Tools center to empower your business and grow with ease.