Restricted Stock And Section 83(b) Elections: IRS Proposes A Change In The Filing Of The Election With Your Tax Return

When you get a grant of restricted stock (but not restricted stock units), you can make what is called a Section 83(b) election to be taxed on the value of the shares at grant instead of at vesting, the usual time of taxation. People sometimes make this election if they strongly believe the stock price will be higher at the time of vesting, meaning it makes sense to pay taxes on the lower value at grant. (Obviously, this strategy involves risks.)

To make an 83(b) election, you must file it on paper with your local IRS office within 30 days of your grant and give a copy to your company. You must also submit a copy of the election when you file your income tax return. This process was simple and clear enough when tax reporting was handled entirely on paper. But how can you submit your paper 83(b) election with your e-filed tax return?

There is no consensus on the method for attaching the 83(b) election to a tax return filed electronically, as many tax returns now are. Some accountants use IRS Form 8453, which is for the submission of supporting paper documents. According to the instructions of the form, if you file your tax return with an online provider, you must mail Form 8453 with your election to the specified IRS address within three business days after you have received acknowledgement from your intermediate service provider and/or transmitter that the IRS has accepted the electronically filed tax return.

However, many accountants disagree with that approach and believe Form 8453 should not be used, as Section 83(b) elections are not listed on it. In an alternative election method, you merely attach the election form with your electronically filed tax return. This is called an Election Explanation Record and occurs when no official IRS form exists for the election. Tax software allows you to create an election explanation in an online screen and submit it with your return. If the Practitioner PIN Method is used to sign the tax return, the IRS does not want you to also attach a copy of the election to Form 8453.

Proposed Amendment Will End Tax-Return Submission Of The 83(b) Election

On July 17, 2015, the IRS and the Treasury proposed an amendment to the regulations under IRC Section 83(b). Because the IRS perceived the problem of attaching a paper election to an electronic filing, the proposal seeks to end the requirement to file a copy of a Section 83(b) election with your tax return. This relaxation of the rules is expected to take effect for grants made on or after January 1, 2016. However, the IRS will allow you to rely on the proposed changes for grants and stock transfers on or after January 1, 2015. Under the amendment, the IRS will simply scan and save a copy of your original election instead of requiring a second submission with your tax return. In addition to Section 83(b) elections for restricted stock, this rule change will also apply to 83(b) elections filed for early-exercise stock options.

For further information on the proposed amendment, see the official notice about it in The Federal Register, the journal of the US government. For additional insights, see a blog commentary by Michael Melbinger, a compensation attorney at Winston & Strawn, and a client alert from Morrison Cohen.

Comments

[Chris Walton]

Great article! This a comprehensive overview of the 83(b) election under the federal tax code, a critical mechanism for individuals receiving restricted stock, or stock options that vest over more than the current tax year. By opting for an 83(b) election, recipients can significantly mitigate their tax burden by paying income tax based on the stock's initial value rather than its value at vesting, potentially saving thousands in taxes as the company grows. However, the article also rightly points out the risks involved, such as the possibility of paying taxes on stock that may never vest or lose value. For those contemplating the 83(b) election, understanding the full implications of a missed 83(b) election deadline is also crucial. A deep dive on the implications of a ‘missed 83(b)’ election, along with potential remedies, can be found at https://etonvs.com/409a-valuation/missed-83b-deadline-remedies/ This additional resource is invaluable for navigating the complexities of tax planning with restricted stock.