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Restricted Stock Grants: IRS Finalizes Change In Tax-Filing Rule

The IRS has officially made it easier for employees to elect to pay taxes on restricted stock at grant instead of at vesting, the standard taxable moment. This choice, called a Section 83(b) election, carries both advantages and risks (it is not available for restricted stock units). To make an 83(b) election on restricted stock, an employee must notify the local IRS office about it within 30 days of the grant date. (With the early-exercise stock options used by pre-IPO companies, any 83(b) election must be made within 30 days of the exercise date.)

In July 2015, the IRS and the Treasury proposed an amendment to the regulations under IRC Section 83(b), which we covered in a blog discussion at that time. That proposal ended the requirement to file a copy of a Section 83(b) election with the employee's tax return. Now the IRS simply scans and saves a copy of your original election instead of requiring a second submission with your tax return. In the proposed regs, the IRS allowed taxpayers to rely on the amendment for grants and stock transfers made on or after January 1, 2015.

On July 25, 2016, the IRS issued final regulations that adopt, without changes, the proposed regulations that were issued during July 2015. In a commentary on this development, the law firm Wilson Sonsini Goodrich & Rosati mentions that the official end of this requirement eliminates what was an awkward tax-return-filing burden for employees, especially anyone filing electronically. In addition, a commentary from the law firm Miller & Chevalier points out that the final regulations are helpful for nonresident alien employees of multinational companies who do not have any US-sourced income, as now they no longer have to file a US tax return just to attach a copy of the 83(b) election. Nevertheless, the final regulations warn employees about their continuing responsibility to keep accurate records on the value of the shares for as long as needed, particularly the original cost basis of the stock, as discussed in an article from Nichols Patrick CPE.

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