irs cover letter 83b

Founder Advice

83(b) election — what is an irs 83(b) election and where to file.

If you’re a first-time founder, you may have never heard of a section 83(b) election before. I know the first time I heard about the 83(b) filing was when our corporate lawyers told us we had 30 days to sign and mail these important documents. Between printing, signing, and shipping, I spent 2 hours carefully putting together the required materials for myself and my co-founder (you’re welcome Collin! :)).

While tedious, an 83(b) election is important to ensure you don’t get hit with a hefty tax bill down the line. This election is especially important for all founders with a large percentage of equity. 

Given how much of a pain it was to handle the 83(b) election, and the number of questions we get asked at Stable from founders who have recently incorporated, we’ve written this article to break down the following questions so it’s easy to understand: 1. What is an IRS 83(b) election form? 

2. What are the 83(b) tax implications?

3. How to file and where to mail 83(b) election?

4. How to confirm the IRS received your 83(b) filing?

This post is aimed for founders and entrepreneurs. If you’re an employee, I’d recommend checking in with your accountant to see if this option makes sense for you because the tax implications may be more complicated.

What is an 83(b) election?

The 83(b) election gives founders the ability to pay taxes on the total fair market value of restricted stock on the date of its grant, instead of when it vests.

Okay, but what does that actually mean?

A Simple Example 

When you incorporate your company, you’ll likely issue shares for co-founders in the company. Many Delaware C-Corporations will initially issue 10 million shares with a very, very low share price. For instance, you may set a share price of $0.00001 per share at incorporation. Because the company has not generated any revenue or value yet, this share price is the lowest it’ll ever be, and founders get to reap the benefits of that.

For simplicity, If you have two co-founders who own fifty percent of the company each (in actuality, you may set aside some shares in an option pool for employees and advisors, but we’re not going to get into that), this will mean the stock is worth $50 (5,000,000 shares x $0.00001). 

So, $50 becomes the “total fair market value of restricted stock on the date of its grant” and the date of the grant is the incorporation date or soon after. As a founder, you’ll “pay” $50 to the company for these shares and likely be put on a 4 year vesting schedule .

What are the 83(b) tax implications?

Now that we’ve established that you own $50 of your company valued at $100, let’s jump into how this can affect your taxes over time. First, you probably incorporated your company to generate revenue and build a meaningful business. Whether you’re aiming for your company to be worth $1 million or $1 billion dollars one day, the value of your company will affect the share price.

Let’s say your company is in fact a unicorn (yay!) one day. At a $1 billion dollar valuation, and again for simplicity assuming no additional issued shares, dilution, or additional shareholders, those shares you once paid $50 for are now worth $500 million! Woo, you’re rich! 

Not so fast though, there are tax implications on that earning. 

In short, receiving restricted stock requires the founder to pay the value of the stock on their individual income tax. Filing an 83(b) election enables you to pay that tax liability upfront for all shares . Otherwise you will need to pay income tax on the value as it vests every year, which is also complicated to keep track of.   

Additionally, when you liquidate your shares, you will pay a capital gains tax on the earnings. This is usually less than how much your individual income tax will be, especially if it is a large amount.

Let’s look at what could happen in both scenarios:

Filed 83(b) election

• Pay income tax on the $50 (10-37%, depending on your income bracket)
• Pay capital gains tax of 20% on $499,999,950 ($50M minus the $50 you already paid as part of your income taxes)
• Therefore, you may pay an income tax of $18.50 (or ($50*0.37) † ) and capital gains tax of $99,999,990 (or $499,999,950*0.20)... which is a total of $100,000,008 in taxes

$100M is a lot of money but now let’s look at what happens if you didn’t file an 83(b) election.

Did not file 83(b) election

• Pay income tax on the $500 million as it vests (10-37%, depending on your income bracket)
• Pay capital gains tax of 20% on the difference of what you paid on the vested value and $500 million
• For this model, let’s assume when the shares vested, the shares were worth $250M 
• The vested value is how much the stock was worth at the date vesting occurred, and in a way the immediate value of the stock
• In actuality, the value will likely be variable over time due to how shares vest
• Therefore, you may pay an income tax of $92.5M (or ($250,000,0000.37) † ) and capital gains tax of $50M ($250,000,000 *0.20)... which is a total of $142,500,000 in taxes

In this simplified scenario, you would save over 42 million if you had filed the 83(b) election form. Seems like a pretty good deal for only filling out a form and sending it in, eh?

In short, because capital gains tax rate is lower than income tax rate for high sums of money, this gives you a tax advantage to categorize the majority of the earnings as capital gains, instead of income.

† Note that the actual income tax would be very slightly less since you can take advantage of lower tax brackets up to ~$500K in earnings. But again, because we’re riding on simplicity and will likely have other income, we’re assuming the highest income bracket.

How to file and where to mail 83(b) election?

Now that you understand what an 83(b) election is, there are specific steps to take to file your 83(b) election and obtain proof of filing in the case that you’re ever audited by the IRS down the line. 

Reminder: you have 30 days to file from the date of your stock grant to file this form

The steps for how to and where to mail 83(b) election are outlined below:

Step 1: Sign the required documents

First, you’ll need to sign the 83(b) election form typically attached to your Stock

Purchase Agreement. Your law firm or incorporation service should have generated this document for you as part of issuing stock. If not, you can use this template from the IRS .

If you signed using a wet signature, you’ll also want to scan a copy of the document for your records.

Step 2: Prepare a cover letter for the IRS

You’ll need to create a cover letter that contains the following information to send with the filing: 

• Name and SSN of spouse (if applicable)

Note : Your law firm or incorporation service may provide this for you.

Step 3: Print the required documents

Print or photocopy the signed 83(b) election form and the cover letter. In total, you should have at least two copies of your 83(b) election form. 

Step 4: Prepare the mailing

In a large envelope, prepare the following documents for mailing:

• Original copy of the signed 83(b) election
• Photocopy of the signed 83(b) election
• IRS cover letter
• Self-addressed and stamped envelope (see below section on how the IRS will confirm reception by mailing a stamped copy back to you)

Step 5: Mail the filing

Go to your local Post Office to mail the filing. You should mail your 83(b) election filing to the same address that you would mail your tax returns to. Depending on your state, the address may differ:

Our law firm recommends sending the 83(b) election through USPS Certified Mail in order to receive a green mailing receipt once you mail the documents. This green mailing receipt can be retained as proof that you’ve made the filing. 

How to confirm the IRS received 83(b)?

When mailing in your 83(b) election, you should include a self-addressed and stamped envelope so that the IRS can mail a copy back to you. In your cover letter, you should include instructions similar to the following:

Please acknowledge receipt of the enclosed 83(b) election form by date-stamping the two additional copies enclosed of this election and returning them in the envelope provided.

By providing the additional copies of your 83(b) election, including a return envelope with postage, and clearly outlining instructions, the IRS will send back a copy of your 83(b) election in the mail to the specified address. When received, you should scan a copy of it for your records. 

If you need a US address to receive the returned 83(b) election from the IRS, you can use a virtual mailbox service like Stable (50% off discount for newly incorporated businesses). With a virtual mailbox, you’ll be notified when you receive the copy of the 83(b) filing and a copy of this filing will be digitally and securely stored. 

Overall, the 83(b) election can be a pain to file, but it is worth the tax benefits for a founder. Being able to take advantage of a lower tax rate for the majority of your earnings can add up in the event of an acquisition or IPO. 

These are detailed instructions to follow on how to compliantly file your 83(b) election — and remember, if you’re looking to have a safe place to receive and digitize the returned 83(b) election from the IRS, you can use a virtual mailbox service like Stable (50% off discount for newly incorporated businesses). 

At Stable , we provide permanent virtual addresses and mailboxes so you never have to worry about mail or changing addresses again. We’ll digitize all mail that you receive here, and you’ll be able to scan, forward, shred, (and even deposit checks!) from anywhere in the world.

Get started with Stable here if you’d like a virtual business address + mailbox in less than 3 minutes. 

Disclaimer: Stable is not a legal or accounting firm, therefore we cannot provide legal or tax advice. You should consult legal and tax professionals for advice on how to meet ongoing obligations that apply to you and your company.

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What Is the 83(b) Election?

Understanding the 83(b) election.

• Tax Strategy

The Bottom Line

• Small Business
• Small Business Taxes

83(b) Election: Tax Strategy and When and Why to File

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

Investopedia / Xiaojie Liu

The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock  at the time of granting.

Key Takeaways

• The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting.
• The 83(b) election applies to equity that is subject to vesting.
• The 83(b) election alerts the Internal Revenue Service (IRS) to tax the elector for the ownership at the time of granting, rather than at the time of stock vesting.

The 83(b) election applies to equity that is subject to vesting, and it alerts the Internal Revenue Service (IRS) to tax the elector for the ownership at the time of granting, rather than at the time of stock vesting.

The 83(b) election documents must be sent to the IRS within 30 days after the issuing of restricted shares. In addition to notifying the IRS of the election, the recipient of the equity must also submit a copy of the completed election form to their employer.

In effect, an 83(b) election means that you pre-pay your tax liability on a low valuation, assuming the equity value increases in the following years. However, if the value of the company instead declines consistently and continuously, this tax strategy would ultimately mean that you overpaid in taxes by pre-paying on higher equity valuation.

Typically, when a founder or employee receives compensation of equity in a company, the stake is subject to income tax according to its value. The tax liability is based on the fair market value of the equity at the time of the granting or transfer, minus any cost of exercising or buying the equity shares. The tax due must be paid in the actual year the stock is issued or transferred.

However, in many cases, the individual receives equity vesting over several years. Employees may earn company shares as they remain employed over time. In which case, the tax on the equity value is due at the time of vesting. If the company’s value grows over the vesting period, the tax paid during each vested year will also rise in accordance.

Example of an 83(b) Election

For example, a co-founder of a company is granted 1 million shares subject to vesting and valued at $0.001 at the time the shares are granted. At this time, the shares are worth the  par value  of $0.001 x number of shares, or $1,000, which the co-founder pays. The shares represent a 10% ownership of the firm for the co-founder and will be vested over a period of five years, which means that they will receive 200,000 shares every year for five years. In each of the five vested years, they will have to pay tax on the fair market value of the 200,000 shares vested.  

If the total value of the company’s equity increases to $100,000, then the co-founder’s 10% value increases to $10,000 from $1,000. The co-founder's tax liability for year 1 will be deduced from ($10,000 - $1,000) x 20% i.e. in effect, ($100,000 - $10,000) x 10% x 20% = $1,800.

• $100,000 is the Year 1 value of the firm
• $10,000 is the value of the firm at inception or the book value
• 10% is the ownership stake of the co-founder
• 20% represents the 5-year vesting period for the co-founder's 1 million shares (200,000 shares/1 million shares)

If, in year 2, the stock value increases further to $500,000, then the co-founder's taxes will be ($500,000 - $10,000) x 10% x 20% = $9,800. By year 3, the value goes up to $1 million and the tax liability will be assessed from ($1 million - $10,000) x 10% x 20% = $19,800. Of course, if the total value of equity keeps climbing in Year 4 and Year 5, the co-founder’s additional taxable income will also increase for each of the years.

If at a later time, all the shares sell for a profit, the co-founder will be subject to a capital gains tax on their gains from the proceeds of the sale.

For restricted stock, you must file your 83(b) election within 30 days of receiving your shares. For stock options , you must file 83(b) within 30 days of exercising your options.

83(b) Election Tax Strategy

The 83(b) election gives the co-founder the option to pay taxes on the equity upfront before the vesting period starts. This tax strategy allows the co-founder to only pay taxes on the fair market value of the shares, minus the cost of exercising the options. If the fair market value of the shares is equal to their strike price, the taxable gain is zero.

The 83(b) election notifies the IRS that the elector has opted to report the difference between the amount paid for the stock and the fair market value of the stock as taxable income. The share value during the 5-year vesting period will not matter as the co-founder won’t pay any additional tax and gets to retain the vested shares. However, if the shares are sold for a profit, a capital gains tax will be applied.  

Following our example above, if the co-founder makes an 83(b) election to pay tax on the value of the stock upon issuance, the tax assessment will be made on the difference between the shares' strike price and their fair market value .

If the stock is sold after, say, ten years for $250,000, the taxable capital gain will be on $249,000 ($250,000 - $1,000 = $249,000).

The 83(b) election makes the most sense when the elector is sure that the value of the shares is going to increase over the coming years. Also, if the amount of income reported is small at the time of granting, an 83(b) election might be beneficial.

In a reverse scenario where the 83(b) election was triggered, and the equity value falls or the company files for bankruptcy, then the taxpayer overpaid in taxes for shares with a lesser or worthless amount. Unfortunately, the IRS does not allow an overpayment claim of taxes under the 83(b) election. For example, consider an employee whose total tax liability upfront after filing for an 83(b) election is $50,000. Since the vested stock proceeds to decline over a 4-year vesting period, they would have been better off without the 83(b) election, paying an annual tax on the reduced value of the vested equity for each of the four years, assuming the decline is significant.

Another instance where an 83(b) election would turn out to be a disadvantage will be if the employee leaves the firm before the vesting period is over. In this case, they would have paid taxes on shares that would never be received. Also, if the amount of reported income is substantial at the time of stock granting, filing for an 83(b) election will not make much sense.

When Is It Beneficial to File 83(b) Election?

An 83(b) election allows for the pre-payment of the tax liability on the total fair market value of the restricted stock at the time of granting. It is beneficial only if the restricted stock's value increases in the subsequent years. Also, if the amount of income reported is small at the time of granting, an 83(b) election might be beneficial.

When Is It Detrimental to File 83(b) Election?

If an 83(b) election was filed with the IRS and the equity value falls or the company files for bankruptcy, then the taxpayer overpaid in taxes for shares with a lesser or worthless amount. Unfortunately, the IRS does not allow an overpayment claim of taxes under the 83(b) election.

Another instance is if the employee leaves the firm before the vesting period is over then the filing of 83(b) election would turn out to be a disadvantage as they would have paid taxes on shares they would never receive. Also, if the amount of reported income is substantial at the time of the stock granting, filing for an 83(b) election will not make much sense.

What Is Profits Interest?

Profits interest refers to an equity right based on the future value of a partnership awarded to an individual for their service to the partnership. The award consists of receiving a percentage of profits from a partnership without having to contribute capital. In effect, it is a form of equity compensation and is used as a means of incentivizing employees when monetary compensation may be difficult due to limited funds, such as with a start-up limited liability company (LLC). Usually, this type of worker compensation requires an 83(b) election.

An 83(b) election allows someone to pay taxes on their stock awards at the time that they are granted, rather than at the time of vesting. This tax law is of particular benefit to startup employees, who may receive a large part of their compensation in the form of restricted stock or stock options. Since startups hope that their share value will increase rapidly, an 83(b) election allows these employees to reduce their tax burden in the long term.

Correction: June 14, 2023— An older version of this article incorrectly stated that someone making an 83(b) election would be taxed according to the cost of exercising their shares. In fact, the tax is based on the difference between the fair market value of the shares and the exercise price.

Internal Revenue Service. " 26 CFR 1.83-2: Election to include in gross income in year of transfer ," Pages 1-3.

Internal Revenue Service. " Internal Revenue Bulletin: 2016-33 ."

Internal Revenue Service. " 26 CFR 1.83-2: Election to include in gross income in year of transfer ," Pages 1-6.

Internal Revenue Service. " Topic No. 427 Stock Options ."

Internal Revenue Service. " 26 CFR 1.83-2: Election to include in gross income in year of transfer ," Page 6.

Internal Revenue Service. " Topic No. 409 Capital Gains and Losses ."

JPMorgan Chase. " Stock-Based Compensation and the 83(b) Election ."

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What Is the Section 83(b) Election? A Guide for Startup Founders

Taxes are one of the few certainties in life, but that doesn’t mean we like to think about them. One of the most common—and most costly—mistakes we see startup founders make is forgetting to account for how their equity is taxed. 

On one level, this is understandable. It’s exciting to receive shares of restricted company stock and dream about how much those shares may be worth someday; it’s less exciting to think about how they’ll be taxed. But understanding how restricted stock is taxed can save you serious money, and the Section 83(b) election is central to that understanding. 

A Section 83(b) election is a short letter you send to the Internal Revenue Service (IRS) to clarify how you want to be taxed on your equity . In this guide, we’ll review everything a startup founder needs to know about Section 83(b) elections—from how they work to whether you may need to file one. We’ll also show you how filing an 83(b) election could save you thousands (and maybe even more) in terms of your overall equity tax bill. 

What is an 83(b) election?

How is restricted stock taxed, the tax benefits of filing an 83(b) election, potential disadvantages of filing an 83(b) election, how to fill in the section 83(b) election form, final thoughts for startup founders.

Section 83 of the Internal Revenue Code (IRC) addresses property transferred in connection with performance of services. Section 83(b) is a specific provision of the tax code that gives startup founders and employees the option to pay taxes on the fair market value of their restricted stock at the time it is granted. If you do not file an 83(b) election in time, your stock will be taxed on its fair market value at the time it vests.

In order to inform the IRS that you want to be taxed on the value of your restricted stock at the time of grant, you must file a Section 83(b) election. The Section 83(b) election is a short document that must be sent to the IRS no later than 30 days after receiving your restricted shares —so you can’t simply wait to send it in with the rest of your income tax return. 

Why vesting matters 

It’s important to note that the 83(b) election applies only to property subject to “a substantial risk of forfeiture.” Restricted stocks qualify because they are subject to vesting.

Vesting means that certain milestones must be met before the recipient is granted full ownership of the stock. This is a common restriction for startup equity . Typically, when a founder or employee is granted equity, they don’t get full ownership of it all at once. Instead, the stock vests based on a vesting schedule. This vesting schedule is often spread out across a period of time (e.g. four or five years) specified in the stock grant. In most cases, if the recipient leaves the company before the final vesting date, they forfeit rights to any unvested stock.

If you don’t file an 83(b) election, your restricted stock will be subject to ordinary income tax on its fair market value at the time it fully vests. Depending on your vesting schedule, it could take your stock years to fully vest. In that time, it’s certainly possible—perhaps even likely—that the fair market value of your stocks will grow.

So, waiting to pay taxes on your shares as they vest means that you will end up paying more taxes if the fair market value of your shares grows over time.

Before we go any deeper, it’s important to pause and review how restricted stock is taxed. Knowing how different tax rates work, and when they apply, can help you make a more informed decision about whether to file an 83(b) election.

Ordinary income tax vs. capital gains tax

Two different types of tax rates that may apply to equity are ordinary income and capital gains. 

If you received your restricted stock as part of your normal compensation (i.e. you paid nothing extra to receive it), its fair market value will be taxed at the applicable ordinary income tax rate . It will be considered taxable income regardless of whether you file an 83(b) election or not. Filing an 83(b) election only affects when your stock will be taxed.

Capital gains tax rates apply to profits you make on assets you already own. So, if you own stock that increases in value and you sell it at a later date, you will pay capital gains tax on your profit (the price you sold the stock for minus the price you paid for it).

There are two types of capital gains tax rates that differ based on their holding period:

• Short-term capital gains rates apply to profits you earn from selling assets you’ve held for a year or less. These are typically taxed at the ordinary or regular income tax rate, so they don’t confer any benefits. 
• Long-term capital gains rates apply to profits earned from selling assets you’ve held for longer than a year. Long-term capital gains tax rates are lower than ordinary income and short-term gains rates.

Since long-term capital gains rates are lower, these are the rates you want to optimize for if possible. The more your gains are taxed at the long-term capital gains rate, the lower your total tax liability.

When you file an 83(b) election, you are essentially fast-forwarding the timeline for when you will need to pay ordinary income tax on your stock. 

You can’t get out of paying ordinary income tax, but paying it earlier can make a big difference. There are two beneficial tax consequences of filing an 83(b) election:

• It accelerates the clock on when you owe ordinary income tax. By paying ordinary income tax on all of your shares at the time of grant, you are essentially betting that the value of those shares will increase over time. If you pay ordinary income tax earlier and your shares then increase in value, you will only be subject to capital gains tax on your profits. Conversely, if you wait to pay ordinary income tax as your shares vest, your tax liability will be higher if the fair market value of your shares gradually increases over time. Remember: You pay tax as a percentage of fair market value, not as a set amount.
• It accelerates the clock on when short-term capital gains become long-term capital gains. An added benefit to paying ordinary income tax earlier is that the clock on your capital gains starts earlier. Holding your shares for at least a year before selling them means that your gains will be taxed at the applicable long-term capital gains rate—which is sure to be lower than the short-term rate.

To better illustrate how this all works, let’s walk through a couple of examples featuring a startup founder named Jeanne.

In both examples, Jeanne is granted a restricted stock award (RSA) of 10,000 shares that vest over four years. The vesting schedule in Jeanne’s grant stipulates that 25% of her shares vest each year, assuming she remains at the company. The fair market value of the stock over the course of those four years increases as follows:

Example of taxes owed when filing an 83(b) election

If Jeanne files an 83(b) election within 30 days of her grant, she will owe ordinary income tax on $50,000 ($5 x 10,000 shares). 

But how much will Jeanne actually pay in taxes on her equity? The maximum ordinary income tax rate in 2022 is 37%, and the full fair market value of her stock will be subject to this tax rate. This means that she will pay 37% of $50,000, which comes out to an equity tax bill of $18,500 .

Now that Jeanne owns her stock and has paid ordinary income taxes on it, any profit she realizes will be taxed at capital gains rates when she decides to sell it.

Example of taxes owed without filing an 83(b) election

If Jeanne does not file an 83(b) election within 30 days of her grant, she will owe ordinary income tax (37%) on her shares as they vest. She won’t pay any taxes on her shares at the time of grant, but she will pay the following taxes on her shares as they vest:

• After Year 1, she will pay $9,250 ($10/share x 2,500 = $25,000) x 37%
• After Year 2, she will pay $13,875 ($15/share x  2,500 = $37,500) x 37%
• After Year 3, she will pay $18,500 ($20/share x  2,500 = $50,000) x 37%
• After Year 4, she will pay $23,125 ($25/share x  2,500 = $62,500) x 37%

Jeanne’s total tax liability without an 83(b) election comes out to a massive $64,750 . That means she’s paying $46,250 more in ordinary income tax than she would if she filed an 83(b) election. Yikes!

In some cases, it may not make sense to file an 83(b) election. 

The above examples assume that the value of the stock will continue to increase over time, but this is by no means guaranteed. If you file an 83(b) election and pay taxes on all of your shares at the time of grant, you should understand the risks. 

There are two scenarios in which filing an 83(b) election could end up hurting more than helping:

• If the value of your equity falls or if your company goes bankrupt, you may have paid taxes for shares that will ultimately be worth less or—in the worst case scenario— worthless . 
• If you decide to leave your company before your shares are fully vested, you will have paid taxes on shares that you never receive. And the prospect of losing shares that you already paid taxes on may compel you to stay at a company even if you’re unhappy. Not a great outcome, all around.

The 83(b) election doesn’t come with a clause that allows you to reclaim any taxes you may overpay at the time of grant, so in both of the above scenarios, you’d have to just eat the cost of the taxes you “pre-pay.”

You can find the 83(b) form here . 

It’s pretty quick to fill in, though you’ll need information about the fair market value of your restricted stock as well as some other information about your stock grant. A few other points to keep in mind once you’re ready to submit the form:

• Plan to make at least three copies of the signed and completed 83(b) form and one copy of the IRS cover letter.
• The original 83(b) form and cover letter go to the IRS along with a stamped and self-addressed return envelope.
• One copy of the completed 83(b) form goes to the company, and one is for your own record-keeping. You may need to attach a third copy to your state personal income tax return. Consult your tax advisor on this before sending it off, as it may not be necessary depending on where you live.

As we’ve demonstrated, the decision to file an 83(b) election is an important one that can result in substantial tax savings. And if you do decide to file an 83(b) election, make sure you do so within 30 days of receiving your stock award . Procrastination is rarely a good policy, but in this case it can make you an extra-grumpy taxpayer.

Oh, and one last thing: It’s always a good idea to consult with a tax advisor if you have questions about the 83(b) election (and even if you think you have it down pat). Some aspects aren’t the most intuitive. For example, the 83(b) election also applies when early exercising stock options, since this produces restricted shares.

If you’re interested in learning more about taxes and equity, we’d love to keep the conversation going. Schedule a call with a Pulley expert today and learn how we can help.

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

For startup founders, Section 83(b) elections are certainly a topic of interest. Business founders have likely heard they should file an 83(b) election, but what exactly is this, when should you file it, 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 is filed to indicate that an elector would like their equity, typically shares of restricted stock, to be taxed at the time it is granted at its fair market value. 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 stage 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 within 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, though limited, there may still be options. However, 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 at fair market value.

Most commonly, the employee must recognize the stock value as income as they satisfy the vesting conditions. Unfortunately, this often happens at a time when it has appreciated in which the amount of taxable income has also increased along with it.

It is important to seek financial and legal advice before proceeding with 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.

If you are the sole founder/equity holder, you should only file an 83(b) election if the equity is subject to vesting. You do not need to make an 83(b) election when there are no restrictions on your ability to dispose of the stock. If for some reason the shares are subject to vesting, you should then consider filing 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, in other words the taxpayer, is the one who files 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 in the long-run.

Can a partnership make an 83(b) election?

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

Does a preferred stock investor need to file an 83(b) election?

For a preferred stock investor, the situation is generally different. Preferred stock typically comes with predetermined dividends and doesn’t have the same vesting requirements as restricted stock or stock options given to employees. Since preferred stock usually isn’t subject to the same type of vesting schedule—where ownership rights are contingent on continued employment or meeting performance milestones—the conditions under which an 83(b) election is relevant don’t usually apply.

In essence, since preferred stock is often fully owned at the time of purchase and isn’t earned based on service or performance criteria, there’s no need to make an 83(b) election. This election is primarily for situations with a risk of forfeiture associated with vesting conditions, which isn’t typically a concern for preferred stock investors. Therefore, preferred stock investors generally do not need to file an 83(b) election.

Can you use online tax platforms to file an 83(b) election?

Many online tax platforms may not directly facilitate the filing of an 83(b) election because it’s a separate process from filing your annual tax returns. However, some platforms may provide guidance or templates for drafting your 83(b) election letter.

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

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

Filing an 83(b) election allows people to pay taxes now, in hopes that a company will be successful and stock value will appreciate. If that happens, tax liability is much more manageable, saving lots of money. Instead of being taxed at the ordinary income tax rate, any additional gain will be taxed at the lower long-term capital gains rate.

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

The biggest risk is that share value may not appreciate, or may even depreciate. In the case of depreciation, because taxes are prepaid on a higher valuation of equity, individuals will have unnecessarily overpaid in taxes . This overpayment of taxes cannot be claimed.

An 83(b) election might also keep an employee around longer than they would like, waiting to see stock options, and not wanting to have paid taxes on shares they will never receive .

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

What are the steps to filing an 83(b) election, what is the best way to fill out an 83(b) form.

Be sure to carefully read over the form and fill in all applicable areas. A financial and/or legal advisor can be extremely helpful in ensuring the form is completed correctly.

How to report income from an 83(b) election

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 do 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. Information on this can be found on the official IRS website.

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 requesting a r eturn receipt . By including a self-addressed stamped envelope and a request that the IRS return forms with a date stamp, you can ideally confirm receipt.

Update: the Internal Revenue Service has announced that it would temporarily allow Section 83(b) elections to be signed digitally or electronically (through October 31, 2023).

When is it detrimental to file an 83(b) Election?

Filing an 83(b) election can be a powerful tool for those who receive restricted stock units (RSUs) or other forms of equity compensation, but there are situations where it could be detrimental. Here are some scenarios in which filing an 83(b) election might not be the best choice:

Uncertain Future Value: If you’re unsure about the future value of the company’s stock, filing an 83(b) election might not be wise. By making this election, you’re essentially prepaying taxes based on the stock’s current value. If the stock value doesn’t increase as expected or even decreases, you’ll have paid unnecessary taxes.

Immediate Tax Burden: When you file an 83(b) election, you’re required to pay taxes on the stock’s fair market value at the time of the grant, even if it’s not yet vested. This can create a significant tax burden that you might struggle to cover if you’re short on cash.

Short-Term Employment: If you’re not planning to stay with the company for the vesting period, filing an 83(b) election might not make sense. You’ll be paying taxes on stock that you may never fully own, potentially losing out on valuable tax benefits.

Lack of Funds: Paying the taxes associated with an 83(b) election can be challenging if you don’t have the cash available. Using your own funds to cover the tax bill may not be practical, and you might end up having to sell some of the stock to cover the tax liability, defeating the purpose of the election.

Complex Tax Situation: If you have a complex tax situation or are not well-versed in tax matters, it’s essential to consult with a tax professional before making an 83(b) election. Filing it incorrectly or without a full understanding of the implications can lead to costly mistakes.

In conclusion, understanding the intricacies of the Section 83(b) election is paramount for startup founders navigating the world of equity compensation. This guide has shed light on the importance, benefits, and potential drawbacks of making this election. As a founder, the decision to file for an 83(b) election should align with your unique financial situation, long-term commitment to the company, and future growth projections. It’s a powerful tool that, when used wisely, can help you optimize your tax strategy and unlock the full potential of your equity awards. Remember, seeking professional advice and carefully weighing the pros and cons are essential steps on your journey toward building a successful startup and securing your financial future. Reach out to Finvisor today, we’re ready to help!

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83(b) Election: Why and When to File

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Taxes are like chores. You pay what you have to, but no more than you need to.

One way to avoid overpaying is understanding the tax code and its various provisions. This can be especially true if you have a complicated tax situation, as employees or company founders with equity compensation often do. Taking advantage of the 83(b) election can help you minimize your tax outlay.

via Zoe Financial

What is the 83(b) election?

When making an 83(b) election, you request that the IRS recognize income and levy income taxes on the acquisition of company shares when granted, rather than later upon vesting. The grant date is when an employee receives a company stock or stock option award. Vesting means an employee has earned actual ownership of the company shares or stock options, usually by satisfying a certain time period of employment.

Making an 83(b) election means that you’re able to pay income taxes earlier, often before your company shares have had the opportunity to appreciate in value. If and when you sell shares for a gain down the road, you’d only be responsible for capital gains taxes as opposed to ordinary income taxes , which are taxed at a higher rate.

Holding shares for over a year prior to selling means you’d pay the more favorable long-term capital gains taxes. Filing an 83(b) also means you can start the holding period clock earlier, right after the grant date, so any capital gains accrued are eligible for the lower capital gains tax rate.

» Want to cut taxes? Explore strategies to reduce capital gains taxes

The 83(b) election can come in handy when you expect to stay with your company for the long term (since you’ll need to wait until your company shares vest to gain actual ownership), and if you expect that the value of your company shares will grow over time.

On the flip side, you could end up prepaying unnecessary taxes if you part ways with your company and never receive ownership of those company shares, or if the value of those shares decreases instead.

Who might file an 83(b) election and why

There are a few situations in which you might file an 83(b) election. If you happen to fall into either of these camps, an 83(b) election could potentially help reduce your tax burden.

Stock option holders: If you’re able to exercise your stock options early (prior to vesting), you could elect to do so and file an 83(b) election within 30 days of exercise. This way, you can potentially minimize your future tax liability if the share price of your company happens to take off.

Startup founders: In some companies, particularly startup companies, compensation for company founders or owners may include a significant amount of restricted stock (not to be confused with restricted stock units or RSUs ). Restricted stock refers to company shares that are subject to certain stipulations, such as vesting and/or forfeiture (losing your shares if you leave the company). Key employees may be awarded a handsome quantity of restricted shares that could significantly increase in value from granting to vesting. Using the 83(b) election allows these employees the chance to save by shifting their tax treatment from ordinary income taxes to capital gains taxes.

» Want to invest in startups? Learn about angel investing

When and how to file an 83(b) election

It is critical to remember to file your 83(b) election within 30 days of being granted restricted shares or within 30 days of exercising your options early. Not doing so results in your company shares being taxed upon vesting as ordinary income. But keep in mind that filing an 83(b) election is usually irreversible, so carefully consider whether you want to do so.

How to file an 83(b) election form

Though there are benefits and drawbacks to consider when deciding whether to file an 83(b) election, the process itself is fairly straightforward.

The employee completes and signs an IRS Section 83(b) form or letter that details certain key information:

Personal identifying information (name, address, Social Security number).

Description of the property awarded (number and type of shares of which company) along with the date received or purchased, any restrictions your shares are subject to and the fair market value of the shares on the date received or purchased.

The amount paid for the company shares.

The amount the employee will indicate as gross income on their income tax return.

The employee mails the election form or letter to their IRS Service Center and provides a copy to their employer.

Best practice is to send your election form through certified mail with a return receipt in case you need to prove that it was sent by a particular date.

If you’re not sure whether the 83(b) fits with your needs, consulting with a seasoned tax or financial advisor can help you decide whether it makes sense to move forward.

» Want a second opinion? A wealth advisor may prove useful for you

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United States: What Is A Section 83(B) Election And Why Should You File One?

Update: on April 15, 2021, the Internal Revenue Service announced that it would temporarily (through December 31, 2021) allow Section 83(b) elections to be signed digitally or electronically, instead of requiring handwritten signatures.

Many founders come to us with questions about  Section 83(b) elections . They have often heard in startup circles that they need to file these, but may not understand when it makes sense to do so or what problem the  Section 83(b) election  solves. This article seeks to clear up some of the confusion about Section 83(b) elections.

So what is a Section 83(b) election? It's a letter you send to the Internal Revenue Service letting them know you'd like to be taxed on your  equity , such as shares of restricted stock, on the date the equity was granted to you rather than on the date the equity vests. Put simply, it accelerates your ordinary income tax. Please note that Section 83(b) elections are applicable only for stock that is subject to vesting, since grants of fully vested stock will be taxed at the time of the grant.

A Little Background on Taxes

To provide some simple tax background, there are different types of tax rates. The maximum  ordinary income tax  rate in 2020 is 37%, whereas the maximum  long-term  capital gains  rate in 2020 is 20%. Because the United States uses graduated tax rates (meaning the rates vary based on your income), you may actually be subject to lower rates, but in each case the long-term capital gains rate will be lower than the ordinary income tax rate.

Assuming you paid nothing for your restricted stock, you will be taxed on the value of your restricted stock as determined at grant (if a Section 83(b) election is filed), or at vesting (if no Section 83(b) election is filed), in each case at the applicable ordinary income tax rate. When you later sell your stock, assuming it's been more than one year from the date of grant (if a Section 83(b) election is filed), or more than one year from the date of vesting (if no Section 83(b) election is filed), the additional gain will be taxed at the applicable long-term capital gains rate. Because the long-term capital gains rate will be lower, the goal here is to get as much of your gain as possible taxed using that rate, rather than the ordinary income tax rate.

Two Simple Examples

In each of the below examples, assume you receive 100,000 shares subject to vesting, worth $.01 per share at the time of grant, $1.00 per share at the time of vesting, and $5.00 per share when sold more than one year later. We'll also assume you are subject to the maximum ordinary income tax rate and long-term capital gains rate. For simplicity, we will not discuss employment tax or state tax consequences.

Example 1 – 83(b) Election

In this example you timely file a Section 83(b) election within 30 days of the restricted stock grant, when your shares are worth $1,000. You pay ordinary income tax of $370 (i.e., $1,000 x 37%). Because you filed a Section 83(b) election, you do not have to pay tax when the stock vests, only on the sale. On the sale (which occurs more than one year after the date of grant) you recognize a taxable gain of $4.99 per share (not $5.00, because you get credit for the $.01 per share you already took into income), and pay additional tax of $99,800 (i.e., $499,000 x 20%). Your economic gain after tax? $399,830 (i.e., $500,000 minus $370 minus $99,800).

Example 2 – No 83(b) Election

In this example you do not file a Section 83(b) election. So you pay no tax at grant (because the shares are unvested), but instead recognize income of $100,000 when the shares vest and thus have ordinary income tax of $37,000. On the sale (which occurs more than one year after the date of vesting) you recognize a taxable gain of $4.00 per share (not $5.00, because you get credit for the $1.00 per share you already took into income), and pay additional tax of $80,000 (i.e., $400,000 x 20%). Your economic gain after tax? $383,000 (i.e., $500,000 minus $37,000 minus $80,000).

So in the above example, filing a Section 83(b) election would have saved you $16,830 .

Filing a Section 83(b) election also has two other benefits. It would have prevented you from having a $37,000 tax hit when the stock vested, which may have been at a time you may not have had cash to pay the tax, and it also starts your long-term capital gains (and qualified small business stock) holding period clock earlier – meaning that you get the long-term capital gains rate as long as the sale of your shares occurs more than a year after grant, rather than a year after vesting (and, in the case of qualified small business stock, you can avoid federal tax entirely if the sale occurs more than five years after grant and certain other conditions are met). For more information on qualified small business stock, please see  this article .

So, you may ask, "if Section 83(b) elections are so beneficial, why doesn't everyone file one?" If you receive restricted stock worth a nominal amount, it virtually always makes sense to file one. However, what if instead of receiving 100,000 shares of restricted stock worth $.01 per share, you received 100,000 shares of restricted stock worth $1.00 per share? Filing a tax code Section 83(b) election would immediately cause you tens of thousands of dollars of tax. And if the company subsequently fails, and in particular if it fails before your stock vests, you likely would have been economically better off to not have filed a Section 83(b) election.

Bottom line – discuss with your individual tax advisor, but remember that the filing must be made (if at all) within 30 days after the grant date of your restricted stock, as that is an absolute deadline that cannot be cured. And note that the grant date of your restricted stock is usually the date the board approves the grant, even if you don't receive the restricted stock paperwork until later – so sometimes you need to act fast in making this decision and filing the correct paperwork.

Instructions for Filing a Section 83(b) Election

The instructions below are intended for  individual US-based purchasers  based on  regulations issued  in July 2016. You should contact your tax professional to review your Section 83(b) election before filing with the IRS. Other purchasers, including corporate or trust purchasers, should contact legal and tax professionals licensed in their jurisdiction.

Please note that the election must be filed with the IRS within 30 days of the date of your restricted stock grant . Failure to file within that time will render the election void and you may recognize ordinary taxable income as your vesting restrictions lapse.

• Make  three  copies of the completed and signed election form and one copy of the IRS cover letter.
• Send the  original  completed and signed election form and cover letter, the copy of the cover letter, and a self-addressed stamped return envelope to the Internal Revenue Service Center where you would otherwise file your tax return. Even if an address for an Internal Revenue Service Center is already included in the forms below, it is your obligation to verify such address. This can be done by searching for the term "where to file" on  www.irs.gov  or by calling 1 (800) 829-1040. Sending the election via certified mail, requesting a return receipt, with the certified mail number written on the cover letter is also recommended.
• Deliver one copy of the completed election form to the Company.
• Applicable state law  may  require that you attach a copy of the completed election form to your state personal income tax return(s) when you file it for the year (assuming you file a state personal income tax return). Please consult your personal tax advisor(s) to determine whether or not a copy of this Section 83(b) election should be filed with your state personal income tax return(s).
• Retain one copy of the completed election form for your personal permanent records.

Note: an additional copy of the completed election form must be delivered to the transferee (recipient) of the property if the  service provider  and the transferee are not the same person.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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If you receive restricted stock (RS) as part of your compensation, or options that allow you to exercise them before they vest, consider making an election under Section 83(b) of the Internal Revenue Code.

What is an 83(b) election?

When you make an 83(b) election with respect to RS or options you receive, you choose to include the value of RS, or the spread of the options (the difference between the strike price – what you pay to exercise the option – and the fair market value at exercise), in your taxable income in the year you make the election, rather than in the future when the RS vests or when you exercise your options after they’ve vested – at which point the value and resulting tax liability may be much higher. To make the election, the stock must be subject to a substantial risk of forfeiture before vesting (e.g., you would lose the stock if you left the company before it vested).

When to consider making an 83(b) election

Consider making an 83(b) election if:

• You receive (i) RS with a low market value per share at the time of grant or (ii) options with a strike price that is close or equal to the market value per share
• You can afford to pay any costs associated with the election (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 believe the value of the company’s stock will increase significantly over time
• The risk that you will forfeit the stock is small (i.e., you don’t expect to leave the company and, as a result, forfeit the stock)
• You believe you will be able to sell your stock later at a higher price

When do you make the election?

For RS , the election must be made within 30 days of receipt of the RS.

For options , the election must be made within 30 days of exercise. You should confirm that your company’s plan allows you to exercise options before they vest.

What happens when you make the election?

When you make an 83(b) election, you elect to include the value of the RS or the spread of the option in your taxable income at that time. Without an 83(b) election, the full value of the RS will be included in your income only when they vest, and the option spread will be taxable at exercise, presumably (in both instances) when the stock price is higher.

As an example, say your company grants you 10,000 shares of RS when the stock is worth $1/share. Those shares vest 25%/year over the next four years. You expect the value of the stock to increase to $5 after one year, to $10 after two years, to $15 after three years, and to $20 in four years when the company goes public.

If you make the 83(b) election, you would include $10,000 (10,000 shares x $1/ share) in your current year’s income. Since you didn’t pay anything for the RS, your basis in the stock would be $10,000. If you hold the stock for at least 366 days, any future gain will generally be subject to tax on sale at long-term capital gains tax rates rather than ordinary income tax rates. If your assumptions about the future stock prices are correct, at the first vesting date, the value of your vesting shares would be $12,500 (2,500 shares x $5/share); at the second anniversary, your vesting shares would be worth $25,000; at the third anniversary, $37,500; and the final tranche would be worth $50,000.

But rather than paying ordinary income tax on $125,000 over the four-year period (as each tranche vests) and long-term capital gains tax on $75,000 (the embedded gain for tranches 1–3) upon sale of the shares in year four, you would have paid ordinary tax on $10,000 upon making the election and long-term capital gains tax on $190,000 upon sale of the shares in year four (the difference between the value of the shares – $200,000 at $20/share – and the shares’ basis – $10,000) – exchanging often higher ordinary income rates for capital gains rates.

Options work similarly, although you control when you will need to make the 83(b) election (and recognize the income), since the 30-day window is first triggered when you exercise the options. Since employee stock options are usually issued with a strike price that is equal to the stock’s fair market value, it can be beneficial to make an 83(b) election shortly after being granted the option, since you would pay tax on the difference between the market value and the strike price, which in this case would be $0.

Note that you would make a regular 83(b) election for nonqualified options and a special 83(b) election for incentive stock options because in the latter case you would be electing inclusion in the alternative minimum tax. Although in general the result is the same, there are potential risks to making the 83(b) election for ISOs if the special ISO holding periods are not met (for example, the business is sold for cash before the end of the holding period).  For further discussion of incentive stock options and the alternative minimum tax, please read our publication, WealthFocus on Incentive Stock Options and the AMT .

How do you make the election?

There is no special form for making an 83(b) election. You must send your election to the company and to the IRS office where you expect to file your tax return. The election should say “Section 83(b) Election” at the top; in it, you need to provide the following information:

• Your name, address and Social Security number;
• A description of the property (e.g., 10,000 shares of common stock of ABC corporation);
• The date you received the property and the year for which you are making the election;
• The nature of the restrictions on the property (e.g., forfeit if employment terminates before vesting);
• The amount, if any, you paid for the property; and
• A statement that you have provided copies of this 83(b) election as required by the law.

You do not have to attach a copy of the election when you file your income tax return for that year.

Consult with a J.P. Morgan advisor and an attorney or tax professional to help you think through some of the issues regarding your stock-based compensation and the section 83(b) election.

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What to Know About Founder’s Equity and the 83(b) Election

• October 13, 2022

Christopher Stroup

Imagine being completely oblivious to one of the most consequential personal finance decisions you may face in your financial journey. What’s more, what if you only had 30 days to make this decision and process the necessary paperwork? 

A founder or early-stage startup employee can face this exact scenario – and this step of their startup journey starts on day zero.

Below, we demystify the largely unknown 83(b) election and explore why this financial feature needs to be on the radar of founders and early-stage startup employees. 

Financial knowledge is for everyone.

First, the basics of restricted stock.

Before diving into the 83(b) election, it’s necessary to understand the basics of restricted stock .   

Restricted stock is given to employees, directors, and advisors in early-stage companies as a form of compensation. Since most early-stage companies are strapped for cash, they offer equity in the company to give early employees an opportunity to benefit from the growth of the business. 

This opportunity helps in a big way. It preserves cash that can be reinvested in the business to develop products and scale. If the venture turns out successful, this equity position can be worth a life-changing amount of money.  

The reason the stock is restricted is due to vesting conditions that may need to lapse; the restriction can also be on when the shareholder is able to sell the stock. Since restricted stock is typically granted at incorporation or shortly after, it’s often issued for a nominal cash payment (such as $0.0001 per share).

To fully own all the shares, most restricted stock requires that shareholders be active with the company for a certain number of years. It’s important you understand the terms and conditions of your grant agreement or work with an advisor that can help you navigate the financial jargon. 

Understanding (Potentially) Negotiable Equity Rights

Thoroughly understanding the equity agreement is essential. Why? It outlines the rights beyond the equity interest entered into between the employee and the company (which can be done at the time the stock is issued or later).  

A host of rights are often outlined in these agreements, such as:

• Vesting provisions. Under a typical vesting schedule, the stock vests in monthly or quarterly increments over four years.
• Accelerated vesting upon sale of the company. Vesting provisions on restricted stock may allow for acceleration of vesting following the sale of the company.
• Right of first refusal. This gives the company or other founders the opportunity to purchase shares that a founder proposes to sell to a third party.
• Co-sale provision. This gives the right to be a seller by providing an opportunity to participate in a sale by a third party.
• Lock-up agreement. These prevent the sale of stock for a period following an initial public offering (IPO), which generally lasts 180 days and may be extended in certain circumstances.
• Super-voting rights. It’s possible to give special voting rights to founding stock that may incorporate 10 or more votes per share, which includes well-known examples like Google, Facebook, and Twitter.

Because of the dynamic nature of startups, it’s best to consider these provisions in the earliest stages of the company.

Making Sense of the 83(b) Election

So, what exactly is the 83(b) election?

For starters, the IRS Section 83(b) election is an approach to minimizing the amount of tax you’ll pay as you vest your stock. By opting to make the 83(b) election and closely following the appropriate steps (more on that later!), you’re electing to pay ordinary income taxes earlier than required. 

You may be asking, “Why would I want to pay the tax sooner?” Well, by making this election and paying the taxes now, you can lock in a low stock value at the time of issuance (such as $0.0001 per share if a founding grant) in exchange for a better tax rate later if the vested shares are sold at a much higher price. 

Basically, you declare ownership early, and pay ordinary income taxes on your ownership when the stock is less valuable – and then pay the lower capital gains rate on the increase in value once sold. In essence, paying now is saving later.

To File or Not to File? 

Here is a real-world example of what goes into the decision of whether to file or not file.

Assume you receive 100,000 shares subject to vesting, worth $.01 per share at the time of grant, $1.50 at the time of vesting, and $4.50 per share when sold more than one year later. (We’ll also assume you are subject to the maximum ordinary income tax rather than long-term capital gains rate. For simplicity, we will not discuss employment or tax consequences.) 

Filing a section 83(b) election would have saved you $25,330! That’s a significant amount, but that’s not the end of the story given several other items to weigh.

Additional 83(b) Election Considerations  

While going through this process, you might want to ensure the rest of your financial house is in order with these 5 financial moves to make while working for a startup .

Once you get to this point in your startup journey, filing the 83(b) election comes with additional considerations. It prevents you from having a tax hit when the stock vests, which might be at a time where you don’t have cash to pay the tax. It also assumes you have the cash reserve on hand to pay the tax up front.

The 83(b) election also starts your long-term capital gains and qualified small business stock (QSBS) holding period clock earlier. This means you get the long-term capital gains rate if the sale of your shares occurs more than a year after grant, rather than a year after vesting. 

In the case of qualified small business stock, you can avoid federal tax entirely if the sale occurs more than five years after grant and certain other conditions are met. Stay tuned for more on QSBS in a future blog!  

So now you may be wondering , “If the 83(b) election is so beneficial, why doesn’t everyone file one?”

If you received restricted stock worth a nominal amount, it virtually always makes sense to file one. However, what if instead of receiving 100,000 shares of restricted stock worth $.01 per share, you received 100,000 shares of restricted stock worth $2.00 per share? 

In that scenario, filing the 83(b) election would immediately cause you tens of thousands of dollars in tax. If the company subsequently fails, especially before the stock vesting period is met, you would have been economically better off to not have filed the 83(b) election.

The Mechanics of Filing Your 83(b) Election  

How do I actually file the 83(b) election? Great question!

Your ducks need to be aligned if you intend to meet all the requirements. (Please note that the election must be filed with the IRS within 30 days of the date of your restricted stock grant.) 

Below are five steps to ensure your 83(b) election is airtight:

• Make three copies of the completed and signed election form and one copy of the IRS cover letter.
• Send the original completed and signed election form and cover letter, the copy of the cover letter, and a self-addressed stamped return envelope to the IRS center where you would otherwise file your tax return.
• Deliver one copy of the completed election form to your company.
• Applicable state law may require that you attach a copy of the completed election form to your state personal income tax return(s) when you file it for the year (assuming you file a state personal income tax return ).
• Retain one copy of the completed election form for your personal permanent records. 

Given the 30-day election period and required processing steps, it’s critical to discuss the pros and cons of filing the 83(b) election as soon as possible with your financial advisor. They can help you understand how this puzzle piece fits into your overall financial portrait and answer the all-important question: to file or not to file?  

Get Started with Your Founder’s Equity Today  

One of the most consequential personal financial decisions you can make as a founder or early employee of a startup essentially happens at day zero. Speak with an advisor today to make sense of your founder’s stock and whether filing the 83(b) election is the right financial move for you.

For more information about Abacus and this article, please read these important disclosures.

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• Stock options
• Exercising stock options

What is the 83(b) election – and when should you file it?

If you have stock options and decide to exercise them early, the 83(b) election is the tax formality that makes your early exercise official to the IRS.

You must file an 83(b) election with the IRS within 30 days of completing your early exericse.

If you have stock options and want to get the full picture of how they work, read our Stock Option Starter Guide .

How do I file an 83(b) election?

• Fill out an election form and cover letter. Find an 83(b) election template online, or ask your accountant or equity strategist to populate one for you.
• Make three copies of the signed election form.
• Send the signed election form and cover letter to your appropriate IRS office, which you can find on the IRS website. Make sure to mail the envelope via certified mail and request a return receipt.
• Send a signed election form to your company.
• Keep the last signed election form with the return receipt for your personal records.

You must do all of this within 30 days of early exercising your stock options.

Don’t wait on this. A timely filing can mean the difference between paying nothing versus a huge and unexpected tax bill down the road.

Why would I want to early exercise my stock options?

Because it could minimize your stock option tax bill and keep the upfront costs of exercising low. To learn more, see " What is early exercising? "

What does the 83(b) election mean technically?

The name refers to a provision under section 83(b) of the U.S. tax code that allows you to elect being taxed on your equity compensation today versus when it vests.

By filing a 83(b) election, you can pay tax on the 409A valuation (also known as fair market value) of company shares today versus their 409A valuation in the future, which will likely be higher. The 409A valuation is reevaluated every once in a while, and grows when your company becomes more successful. 

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How to File an 83(b)

When I joined Shoobx as a very early employee I received an option grant, “Welcome aboard!” Because the company wants its employees to benefit from the potential tax advantages it offers, Shoobx permits early exercise of options. This means I was able to exercise all of my shares when I started—before they had actually vested. At that point, my new colleagues clued me into the fact that I would likely want to file an 83(b) election with the IRS, “Just do it, Jen,” and encouraged me to do so in a timely fashion, “You only have 30 days, don’t %!&@# it up.”

In simple terms, an 83(b) election is a letter you send to your friends at the IRS letting them know you’d like to be taxed now on your equity. 83(b) is named for the relevant section of the Internal Revenue Code. Check out our blog post, The Buzz about 83(b) , to learn more, including the possible tax implications.

Based on some helpful guidance, I decided that an 83(b) election was the right choice for me and here are the exact steps I followed to file it:

• Purchase the shares. I signed the paperwork and handed over a check for the purchase amount. With that my 30-day filing clock started ticking.
• Fill out a cover letter and election form. I added my information to the standard cover letter to the IRS and completed the 83(b) election form . (If you are lucky enough to be a Shoobx user, this is super easy because Shoobx has templates and will create these documents for you.)
• Cover letter
• 83(b) election form
• Second copy of the 83(b) election form
• Self-addressed stamped envelope

I addressed the envelope to the IRS using the address where I would mail my personal tax return if I were not making a payment. (This varies by state of residence and can be found on the IRS website . Click on your state, then look for where you would mail a 1040 without a payment.)

• Wait an indeterminate period of time. It took a few weeks for me to get my stamped copy back from the IRS. (Based on the anecdotal evidence of my co-workers, the amount of time you wait is highly variable.)
• Give a copy to the company. I made a copy of the stamped 83(b) election and gave it to my employer. I also kept a copy for my personal records. (If you are a Shoobx user, Shoobx will safely store your 83(b) election form for you.)

That’s what I did. If you decide an 83(b) election is right for you, I hope you’ll find this helpful. But remember: the IRS is always the definitive expert on the IRS—and the rules may change from year to year (like whether you have to include a copy with your tax return or not)—so check with them if you have any questions.

Need a platform that helps you manage all of your documentation ? You're in the right place. 

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83(b) Elections For Dummies

First, a few basics:.

• If you have stock options, you do not need to file an 83(b) Election Form, unless you exercised the option early.
• If you purchased/received founder’s stock and there are no restrictions, such as vesting, you do not need to file an 83(b) Election Form.
• If you purchased/received restricted stock in a growing startup, you should probably (about 99% of the time) file an 83(b) Election Form.

Here is why you want to file an 83(b) Election:

• If you think the value of your stock will increase, you will NOT be forced to pay taxes on “phantom income” each year.

Let’s give an example to show the consequences of not filing an 83(b) election:

• You own 10% of the stock of your startup. It vests over 4 years, or 25% per year.
• You purchased this stock for $100 (fair market value) on January 1 of Year 1.
• During Year 1, the Company raised some outside financing that values the company at $10M.
• At the end of Year 1, the value of the Company is $10M and the value of your stock is worth $1M.
• You have about $250K in taxable income in Year 1 ( [value of Company at year-end, $10M less value of Company at beginning of year, $1K] * ownership percentage, 10% * vesting % in Year 1, 25%).
• You owe about $100K in Federal and State taxes.
• You will pick up additional taxable income in Year 2 through Year 4 if the value of the startup continues to increase.
• You do not get any tax relief if the value of the Company decreases.
• Remember, this “phantom income” is triggered just by the value of the Company increasing – not by exercising the options or selling the stock.

Here is how to file an 83(b) election:

• Download the Sample 83(b) Election Form and Letter below.
• Sign the 83(b) Election Form and letter and follow the instructions in the letter.
• Mail the letter and 83(b) Election Form to the IRS address (see dropdown below for address) within 30 days after the stock grant (there is no relief if you file late).
• Mail Certified Return Receipt Requested to prove timely delivery.
• If you live in a community property state, your spouse also needs to sign the 83(b) Election Form.
• Give a copy of the signed 83(b) Election Form to the Company.

SAMPLE SECTION 83(b) ELECTION FORM:

[wpforms id=”1762″ title=”false”]

SAMPLE TRANSMITTAL LETTER TO IRS:

[wpforms id=”1761″ title=”false”]

WHERE TO MAIL THE LETTER AND 83(b) ELECTION FORM TO:

Before mailing, check the IRS instructions for Form 1040 and/or consult your tax advisor to ensure the addresses below are still valid as the IRS occasionally changes mailing addresses.

IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

83(b)s CAN BE CONFUSING.

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• EMPLOYEE BENEFITS & PENSIONS

Missed Sec. 83(b) elections: Partnership and LLC special issues

• Partnership & LLC Taxation
• Contributions, Distributions & Basis
• Employee Benefits
• Types & Qualifications

Editor: Alexander Semerano, CPA

Questions about missed Sec. 83(b) elections can arise when a company’s founder or other employee receives stock or other equity that is subject to vesting. The default tax rule under Sec. 83 for stock subject to vesting is that income will be recognized when the stock vests, at the value at the time of vesting. But if a Sec. 83(b) election is made, the recipient is taxed at the time of the grant of the stock, at its value at that time.

In many cases, making the election is an obvious choice, particularly for stock in early-stage startup companies that have low valuations. But in the hectic atmosphere of starting a company or closing on an investment, the task of making the election is sometimes overlooked, and there is generally only a 30-day window to notify the IRS of the election.

I  previously wrote  about potential solutions for taxpayers who missed making their Sec. 83(b) elections. That article provided an overview of the subject, and the examples involved employees receiving stock of a corporation. Although that analysis also applies to partnerships and limited liability companies (LLCs) taxed as partnerships, taxpayers may encounter partnership-specific issues and opportunities in addressing their Sec. 83 situations.

After first providing some background on Sec. 83, this discussion focuses on grants of profits interests in a partnership or LLC (both of which this item refers to as “partnerships”) and the relevance of Sec. 83(b) elections.

Sec. 83 generally

Not making a Sec. 83(b) election, or making it late, generally means that the receipt of the property that is subject to a substantial risk of forfeiture (e.g., corporate stock granted to employees subject to time-based vesting) will be taxed under the rules of Sec. 83(a). In such a case, the recipient will not need to recognize any taxable income upon receipt of the property, but when the vesting condition is met, the fair market value (FMV) of the property  at the time of vesting  becomes taxable income, taxable as compensation. This can be a double disadvantage: If the company has increased in value, the holder generally must take into account a greater amount of income at vesting than they would have had they made the Sec. 83(b) election, and such income is taxed as ordinary income rather than as, potentially, capital gain.

In contrast, if a Sec. 83(b) election is made, the holder of the property is taxed on the value at the time of transfer, which is generally low for startups (or at least a lot lower than the company hopes it will be in a few years), and any appreciation in the property after that will generally be taxed as capital gain upon a sale of the property (e.g., a sale of the company’s stock). Note that this tax treatment matches that of a grant of property that is not subject to vesting.

Special considerations for profits interests in a partnership or LLC

In some cases, the property subject to vesting will not be corporate stock but rather interests in a partnership. If those are profits interests, then the situation with respect to Sec. 83 is slightly different. In particular, the rules may present a “way out” for certain recipients who missed making a Sec. 83(b) election.

Defining a profits interest:  The first question is, is it a profits interest? For these purposes, the universe of partnership interests can be divided into two nonoverlapping groups: capital interests and profits interests. Under Rev. Proc. 93-27, a capital interest is an interest in a partnership that would give the holder a share of the proceeds if the partnership’s assets were sold at FMV and the proceeds were then distributed in a complete liquidation of the partnership (this is generally determined at the time of receipt of the partnership interest). Anything that is not a capital interest is a profits interest.

In other words, a grant of a profits interest gives the recipient an interest only in the  future  profits of the partnership. Also derived from Rev. Proc. 93-27, the conceptual test for whether an interest is a profits interest is to model the following hypothetical: If the interest were granted, and the partnership liquidated immediately after the grant, paid off all creditors, and distributed the net proceeds, would the recipient of the interest be entitled to any proceeds of the liquidation? If yes, it is a capital interest. If no, then it is a profits interest.

Basic rules for profits interests:  Rev. Procs. 93-27 and 2001-43 lay out the rules applicable to profits interests. The receipt of a capital interest in exchange for services is taxable as compensation under Regs. Sec. 1.721-1(b) (1) (and under general tax principles). However, prior to Rev. Proc. 93-27, courts were not consistent about whether the receipt of a profits interest was generally taxable and how the ability to value the profits interest factored into the tax analysis (see Section 3 of Rev. Proc. 93-27). The two revenue procedures clarify these issues.

In the case of a profits interest that is granted “for services provided to or for the benefit of the partnership,” Rev. Proc. 93-27 provides that the actual receipt of the interest will generally not be treated as a taxable event. Further, under Rev. Proc. 2001-43, if the profits interest is subject to vesting, then generally, the vesting of the profits interest will also not be treated as a taxable event (even if, at the time of vesting, the interest has a nonzero value). Finally, Rev. Proc. 2001-43 provides that no Sec. 83(b) election needs to be made with respect to a profits interest to get this tax treatment (unlike corporate stock).

Prerequisites:  However, there are certain requirements for these revenue procedures to apply. For one, these rules do not apply if the recipient disposes of the profits interest within two years. The rationale seems to be that if the interest is worth something in two years, it was worth something at grant and that the value was reasonably determinable.

For another, if the profits interest relates to a “substantially certain and predictable stream of income from partnership assets,” such as a “highquality net lease” or “high-quality debt,” then these revenue procedures cannot be relied upon. Unfortunately, neither the IRS nor the courts have provided any further insight into what constitutes a “substantially certain and predictable stream of income,” “highquality debt,” or a “high-quality net lease.”

The reason for excluding partnership interests that relate to a predictable stream of income seems to be that if a recipient knows its future income with a high degree of certainty and is not taking on any entrepreneurial risk, then perhaps taxation upon receipt would be proper, because one could calculate the value of the interest (e.g., based on the discounted cash flows), and such value would be greater than zero.

The third exception stated in Rev. Proc. 93-27 is for limited partnership interests in a publicly traded partnership (as defined in Sec. 7704(b)). The rationale here seems to be that a publicly traded interest does have a reasonably determinable price, as set by the market. As an aside, in 2005, the IRS issued proposed regulations and a notice that would have changed the rules applicable to partnership profits interests, simplifying the rules overall and establishing a regulatory safe harbor that a partnership would need to elect into regarding how to value the interests but also requiring an affirmative Sec. 83(b) election (REG-105346-03). These regulations were never finalized and may not be relied upon, but it is possible that similar regulations will be introduced in the future.

Another consideration:  One other situation that could cause issues is if the “profits interest” was actually a capital interest; for example, if the parties took the position that the value of the partnership at the time of grant was lower than it should have been.

To put numbers to it, if the parties claim the partnership is worth $1 million, then a profits interest should be entitled to nothing upon a hypothetical liquidation of the partnership immediately after grant. The recipient of the profits interest could share in future appreciation of the partnership to the extent the partnership’s value exceeded $1 million. But if the partnership were  actually  worth $5 million at the time of grant, then upon a hypothetical liquidation immediately after grant, instead of being entitled to zero proceeds, the recipient of the purported profits interest could be entitled to share in some of the preexisting $4 million of value (above the $1 million threshold), which is contrary to the definition of a profits interest.

Helping clients who receive profits interests

From a planning perspective, it may seem as though no Sec. 83(b) election is necessary for a partnership or LLC profits interest. However, the benefit of these revenue procedures is not guaranteed, due to the need to meet the requirements described above. The better course in most cases is to make a “protective” Sec. 83(b) election with respect to unvested profits interests; in other words, file the election as if your client could not rely on Rev. Proc. 93-27 and Rev. Proc. 2001-43 (even though you hope and expect them to apply). There is essentially no downside to a protective election, and that way, if the profits interest fails to meet the requirements of these revenue procedures (e.g., by being sold within two years of grant), the employee retains most of the hoped-for tax benefits: a zero or low initial tax bill in connection with the grant of the interest and the potential for long-term capital gains on all future appreciation.

From the perspective of representing an employee who missed making a Sec. 83(b) election, there may be good news. If the employee received a true profits interest in exchange for services, does not dispose of the interest within two years, the interest does not relate to the kind of predictable income stream noted, and the interest is not in a publicly traded partnership, then the employee generally should be treated the same way as if they had timely made a Sec. 83(b) election. However, employees may not always have control over the timing of their interest's disposition or the assumed value of the partnership. In some cases, it may make sense to try to remediate their situation.

As I noted in my prior article, if you are up at night sweating over a client’s not making a Sec. 83(b) election, just keep calm — hope is not necessarily lost.

Editor Notes

Alexander Semerano , CPA, is a partner with Pease Bell CPAs in Cleveland.

For additional information about these items, contact Alexander Semerano at [email protected] .

Unless otherwise noted, contributors are members of or associated with CPA America.

Sale of clean-energy credits: Traps for the unwary

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This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.

PRACTICE MANAGEMENT

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U.S. Department of the Treasury

U.s. department of the treasury, irs release guidance to drive american innovation, cut aviation sector emissions.

Biden-Harris Administration Partners Announce Updated GREET Model to Measure Lifecycle Emissions from Sustainable Aviation Fuels 

WASHINGTON – Today the U.S. Department of the Treasury and Internal Revenue Service (IRS) released guidance on the Sustainable Aviation Fuel (SAF) Credit established by the Inflation Reduction Act (IRA), part of President Biden’s Investing in America agenda to create good-paying jobs and reduce climate pollution by spurring innovation in the aviation industry.  

The Treasury Department worked closely with Biden-Harris Administration partners, including the Environmental Protection Agency (EPA), Department of Transportation (DOT), Department of Agriculture (USDA), and Department of Energy (DOE) on today’s Notice.  

“President Biden’s Inflation Reduction Act is driving American innovation to create good-paying jobs and help the U.S. clear hurdles in our clean energy transition,” said U.S. Secretary of the Treasury Janet L. Yellen. “Incentives in the law are helping to scale production of low-carbon fuels and cut emissions from the aviation sector, one of the most difficult-to-transition sectors of our economy. Today’s guidance provides additional clarity and certainty to companies and producers.”

“Sustainable aviation fuel is a key part of the Biden-Harris Administration's efforts to transition the American economy to a clean energy future and rebuild the middle class from the bottom up to the middle out in rural America,” said U.S. Secretary of Agriculture Tom Vilsack . “Today’s announcement is an important stepping stone as it acknowledges the important role farmers can play in lowering greenhouse gas emissions and begins to reward them through that contribution in the production of new fuels. This is a great beginning as we develop new markets for sustainable aviation fuel that use home grown agricultural crops produced using climate smart agricultural practices. USDA will continue to work with our federal agency partners to expand opportunities in the future for climate smart agriculture in producing sustainable aviation fuel.”

“The guidance released today reflects the latest data and science needed to help create new economic opportunities for America's agricultural sector,” said U.S. Secretary of Energy Jennifer M. Granholm . “This interagency effort will help our climate goals take flight with cheaper, cleaner sustainable aviation fuel -- ensuring America maintains an innovative edge on the global clean technology stage.”

“Innovation in the aviation sector has brought our country and our world together and now, it’s fueling the solution to meet our ambitious net-zero carbon emission goals,” said U.S. Secretary of Transportation Pete Buttigieg . “Today’s announcement will strengthen America’s position as a leader in the production of sustainable aviation fuels, help cut carbon emissions, and create a better future for all Americans.”

“The Inflation Reduction Act’s tax credit for sustainable aviation fuels is a critical tool for decarbonizing air travel,” said John Podesta, Senior Advisor to the President for International Climate Policy.  “Today’s announcement of an updated GREET model and Treasury guidance is a big step forward for American farmers, for American innovation, for American jobs, and for America’s ability to cut carbon pollution from our transportation sector and protect our planet.”

The Treasury Department’s guidance provides important clarity around eligibility for the SAF Credit. The credit incentivizes the production of SAF that achieves a lifecycle greenhouse gas emissions reduction of at least 50% as compared with petroleum-based jet fuel. Producers of SAF are eligible for a tax credit of $1.25 to $1.75 per gallon. SAF that achieves a GHG emissions reduction of 50% is eligible for the $1.25 credit per gallon amount, and SAF that achieves a GHG emissions reduction of more than 50% is eligible for an additional $0.01 per gallon for each percentage point the reduction exceeds 50%, up to $0.50 per gallon. 

As part of today’s guidance, the agencies comprising the SAF Interagency Working Group (IWG) are jointly announcing the 40B SAF-GREET 2024 model. This model provides another methodology for SAF producers to determine the lifecycle GHG emissions rates of their production for the purposes of the SAF Credit.

The modified version of GREET incorporates new data, including updated modeling of key feedstocks and processes used in aviation fuel and indirect emissions. The modified GREET model also integrates key greenhouse gas emission reduction strategies such as carbon capture and storage, renewable natural gas, and renewable electricity.

The Notice released today also, on a pilot basis, incorporates a USDA pilot program to encourage the use of certain Climate Smart Agriculture (CSA) practices for SAF feedstocks. Incorporating CSA practices into the production of SAF provides multiple benefits, including lower overall GHG emissions associated with SAF production and increased adoption of farming practices that are associated with other environmental benefits, such as improved water quality and soil health. 

For corn ethanol-to-jet, the pilot provides a greenhouse gas reduction credit if a “bundle” of certain CSA practices (no-till, cover crop, and enhanced efficiency fertilizer) are used. It similarly would allow a greenhouse gas reduction credit for soybean-to-jet if the soybean feedstock is produced using a “bundle” of applicable CSA practices (no-till and cover crop). This is a pilot program specific to the 40B credit, which is in effect for 2023 and 2024.

To credit CSA practices in the Clean Fuel Production Credit (45Z), which becomes available in 2025, the agencies will do further work on modeling, data, and assumptions, as well as verification. A new 45Z-GREET will be developed for use with the 45Z tax credit.