A taxpayer who makes a Section 83(b) election to accelerate the income taxation date of certain transferred property is no longer required to file a copy of the Section 83(b) election with his or her tax return for the year in which the election is made. A taxpayer is still required to file a copy of the executed Section 83(b) election with the IRS and the employer within 30 days of the property transfer date. The relaxed filing requirement is effective for property transferred after January 1, 2016. The reason for the change in IRS position is to facilitate electronic filing of individual tax returns.
In general, a Section 83(b) election is a tool a taxpayer can use to pay tax at an earlier date than otherwise required under IRS rules. The advantage of making such an election is to pay tax based on a lower property value and to lock in capital gains treatment. One common scenario is a start-up company which awards restricted stock to attract and incentivize key employees. Assume the restricted stock vests on the three year anniversary of the grant date. Under IRS rules, the key employee is taxed on the fair market value of the stock on the vesting date, at which point the start-up company’s stock has presumably increased in value thereby requiring a larger out-of-pocket tax payment by the key employee. If the key employee instead makes a Section 83(b) election within 30 days of the grant date, and he files the election with the IRS and the employer, the key employee will only owe tax on the grant date value of the stock. The other advantage is that the holding period for capital gains treatment starts on the grant date rather than three years later on the vesting date.
Please note that Section 83(b) elections only apply to a transfer of property. A Section 83(b) election is not available for stock option, phantom stock or deferred compensation awards since they do not represent a transfer of property under IRS rules.
For more information, please contact Roberta Granadier in our Troy, Michigan office at 248-433-7552.