83(b) Elections For Dummies

 

 

First, a few basics:
• If you have stock options, you do not need to file an 83(b) Election Form.
• If you purchased/received founder’s stock and there are no restrictions, such as vesting, you do not need to file an 83(b) Election Form.
• If you purchased/received restricted stock in a growing startup, you should probably (about 99% of the time) file an 83(b) Election Form.

 

Here is why you want to file an 83(b) Election:
• If you think the value of your stock will increase, you will be forced to pay taxes on “phantom income” each year.

 

Let’s give an example to show the consequences of not filing an 83(b) election:
• You own 10% of the stock of your startup. It vests over 4 years, or 25% per year.
• You purchased this stock for $100 (fair market value) on January 1 of Year 1.
• During Year 1, the Company raised some outside financing that values the company at $10M.
• At the end of Year 1, the value of the Company is $10M and the value of your stock is worth $1M.
• You have about $250K in taxable income in Year 1 ( [value of Company at year-end, $10M less value of Company at beginning of year, $1K] * ownership percentage, 10% * vesting % in Year 1, 25%).
• You owe about $100K in Federal and State taxes.
• You will pick up additional taxable income in Year 2 through Year 4 if the value of the startup continues to increase.
• You do not get any tax relief if the value of the Company decreases.
• Remember, this “phantom income” is triggered just by the value of the Company increasing – not by exercising the options or selling the stock.

 

Here is how to file an 83(b) election:
• Copy and paste the 83(b) Election Form sample below and edit the fields that are highlighted in yellow.
• Copy and paste the IRS sample cover letter below and edit the fields that are highlighted in red.
• Enclose a self-addressed stamped envelope
• Mail it to the IRS address below within 30 days after the stock grant (there is no relief if you file late).
• Mail Certified Return Receipt Requested to prove timely delivery.
• Attach a copy of the 83(b) to your personal tax return in Year 1. (this means that you cannot e-file your return that year).
• If you live in a community property state, your spouse also needs to sign the 83(b) Election Form.
• Give a copy of the signed 83(b) Election Form to the Company.

 

 

SAMPLE SECTION 83(b) ELECTION FORM:
Election Under Section 83(b) of the Internal Revenue Code

 

The undersigned hereby makes an election pursuant to Section 83(b) of the Internal Revenue Code with respect to the property described below:

1. Name and Address of Taxpayer:

XXXXXXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX
Taxpayer SSN # :
XXXXXXXXXXX
2. Description of property with respect to which election is being made:

 

XXXXX shares of the common stock of XXXXXXX, (the “Company”) ($X.XXXX par value).
3. Date on which property was transferred is XXXXXXX.
4. The taxable year for which this election is being made is calendar year 20XX.
5. Nature of restrictions to which property is subject:

 

YOU CAN COPY AND PASTE FROM YOUR RESTRICTED STOCK GRANT THE RESTRICTIONS, SUCH AS VESTING, ETC.
6. The fair market value at time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the property with respect to which this election is being made is $X.XX per share, for a total aggregate value of $XXX.XX.
7. The amount paid by the taxpayer for the property is $XXX.
8. A copy of this statement has been furnished to [Company name].
Dated: XXXXXX XX, 20XX

 

 

Signed,
___________________________________
XXXXXXXX X XXXXXXXXXXXXXX
____________________________________
SPOUSE SIGNATURE, IF COMMUNITY PROP STATE

 

 

____________________________________
SPOUSE NAME PRINTED

 

 

 

 

SAMPLE TRANSMITTAL LETTER TO IRS:


Name and Address of Taxpayer:
XXXXXXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX
Taxpayer SSN # :
XXXXXXXXXXX
Dated: XXXXXX XX, 20XX
IRS Service Center Address From Below
Dear Sir or Madam:
Pursuant to Treasury Regulations Section 1.83-2(c) promulgated under Section 83 of the Internal Revenue Code of 1986, as amended (the “Code”), enclosed please find a copy of an election under Section 83(b) of the Code.

 

Also, attached are a self-addressed stamped envelope and a signed copy of my 83(b) Election Form. Please date stamp the copy of the Election Form, enclose it in the attached envelope and mail it to me.
Thank you,
________________________________
XXXXXXXX X XXXXXXXXX
Enclosures
WHERE TO MAIL THE LETTER AND 83(b) ELECTION FORM TO:
If you live in:

 

Alabama, Georgia, North Carolina, South Carolina, Kentucky, Tennessee, Missouri, New Jersey, Virginia, West Virginia, Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New York, Pennsylvania, Rhode Island, Vermont:

Department of the Treasury
Internal Revenue Service
Kansas City, MO 64999-0002

Florida, Louisiana, Mississippi, Texas:

Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0002

Alaska, Arizona, California, Colorado, Hawaii, Nevada, Oregon, Washington,Arkansas, Idaho, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota, Utah, Wisconsin, Wyoming:

Department of the Treasury
Internal Revenue Service
Fresno, CA 93888-0002

A foreign country, U.S. possession or territory* or use an APO or FPO address, or file Form 2555, 2555-EZ, or 4563, or are a dual-status alien:

Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215

Accountalent’s tax preparation for startup companies

Offer for 1st Year Seed Stage Clients:

  •  Preparation and filing of the following tax return:
    • Federal Corporate Income Tax Return
    • State Corporate Income Tax Return
    • DE Secretary of State Franchise Tax Return
    • Secretary of State Annual Reports
    • Form 1099s (all versions, such as MISC, DIV, INT, etc)
  • QuickBooks setup
  • Financial Statement Preparation
  • Payroll setup
  • Consulting (up to 2 hours)
  • Unlimited emails and phone calls

Fee:

  • $1,250 for the first year. $1,650 for second year. No 2-year commitment.
  • Additional Charges for Foreign filings:
    • $250 for each Form 5472 (25% Foreign Owner) and each FBAR ($10K in a foreign bank account)
    • $500 for each Form 5471 (foreign subsidiary)

 

Contact: Joe Faris, 978-621-0759, jfaris@accountalent.com

_____________________________________________________________________________
IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

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  • Blake Bunker

    What if unrestricted stock was purchased by a founder and held for one year or so and then a vesting agreement was added later to that stock?

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      If you signed a Restricted Stock Agreement when the vesting was introduced, you should have filed an 83(b) election. There is no guidance, though, from the IRS that I was able to locate on this specific issue.

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    When is the TAX YEAR OF STOCK ISSUANCE ??

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    To clarify, this needs to be filed within 30 days of the day you buy the stocks. That is, within 30 days of the day you actually have the stocks in your possession. So for example, you may have been granted the stocks on July 1st, but if you only purchased the stocks on Dec 1st, you’d have to file the 83b) form within 30 days of Dec 1st (Dec 31st).

    I called my accountant to confirm this and you should too!

  • shessi

    I did everything except the stamped letter part…I never got a response. Now what happens

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      There will be no response unless you provide the IRS with a copy of the 83(b) and a stamped, return envelope. Otherwise, you should have submitted via Certified Mail or using a courier service (UPS, FEDEX) and keep the receipt and your dated letter as evidence that you filed within the 30-day window.

      • Rob H

        I’ve done this twice and sent a stamped addressed return envelope both times, neither time did the IRS respond. I do have the certified letter return receipt though. I don’t think they respond if you send it with a return receipt. But that is just a guess.

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