August 29, 2016
Change in Filing of 83(b) Election
By Stephen Gilman, Partner, Tax & Business
The IRS has issued a final regulation that eliminates the requirement for an 83(b) election to be attached to an individual's tax return for property transferred on or after January 1, 2016. An individual must ordinarily pay tax on the difference between the fair market value (FMV) of property received and the amount paid for that property, when the individual received such property for the performance of services and the individual's rights in the property are transferrable or not subject to substantial risk of forfeiture.
For example, an employee is given stock in the company he works for, which is subject to a vesting period. Every time a portion of the stock vests, the employee must recognize ordinary income for the difference in the FMV at the vesting date and the amount that the employee paid for the stock. This can get very expensive if the stock value is rising.
An 83(b) election would have allowed the employee to include income and pay tax at the time of the initial transfer, based on the difference between the FMV at date of transfer and the amount paid (if any). In most cases, this is a good idea, especially for start-up companies where the stock value is initially very low.
This allows future appreciation of the stock to be taxed at capital gain rates, which are usually lower than ordinary income rates. In addition, that tax (and income recognition) is only paid when the stock is sold.
An 83(b) election must be filed with the IRS within 30 days of the initial transfer. A copy of the filing must be given to the employer. Previously, that copy was required to be attached to the individual's income tax return. The new regulation eliminated that requirement.
Should you have any questions related to receipt of restricted shares and income recognition, or making an 83(b) election, contact your Marcum tax professional.