In the case you are not familiar, the 83(b) election is a plan under the Internal Revenue Code that allows an employee, or startup founder, the option to pay taxes on the fair market value of restricted stock. This applies to equity that is apt to vesting and alerts the IRS. Overall, the 83(b) election means you pre-pay your tax liability on a lower valuation of the equity, with the assumption that the value will increase in several years. Whether you are compensated with stock, cash, or another asset, the IRS treats it as income and uses market value. This provision can yield huge savings for employees and start-up founders. Continue readings to further understand how the 83(b) election can save you money this tax season!
If you think your company’s stock price is going to increase majorly, you have the ability to pay your taxes now through a 83(b) election. While the stock price is low, the difference between exercise price and the market value is extremely low. You would essentially only pay taxes on your capital gain. A 83(b) election could significantly reduce your tax liability, saving you thousands of dollars.
A 83(b) election can prevent you from being hit with a considerably large tax burden when the stock is vested. This tax burden could come at a time where you are unprepared to pay thousands of dollars in taxes. This would start your long-term capital gains holding period earlier, meaning you can get the long-term capital gains rate as long as the sale of your shares happened more than a year after they were granted to you.
Start-up founders typically hold restricted stock in their company so they could save a substantial amount of money on taxes since it is based on the fair market value when granted. Filing a 83(b) election is smart for founders because they usually are granted a high amount of stocks from the start-up. The start-up is able to avoid having to determine the value of the shares every time more shares vest if a 83(b) election is filed. The start-up also does not have tax reporting or employment tax obligations dealing with vesting shares.
If you receive restricted stock from your employer worth a small amount, it makes sense to file for a 83(b) election. A 83(b) election can only be filed for 30 days after the grant date of your restricted stock so you need to act fast. This provision could make sense when the elector is confident that the values of the shares are going to increase in the next few years.
In any case, be sure to consult a tax advisor on what would be best for you. A professional can provide what options are the most beneficial for you and your tax liability.
If you would like to learn about Eagle Grove Advisors and how we can help you meet your financial goals, schedule a time on my calendar here!
Sources:
https://www.investopedia.com/terms/1/83b-election.asp
https://www.wealthenhancement.com/blog/83b-election-might-be-right-for-you
https://www.dwt.com/blogs/startup-law-blog/2020/10/section-83b-election-for-startup-founders
