Do I Need to File an 83(b) Election Form?
There is no requirement to file an 83(b) Election Form. By default, the IRS assumes that you have not filed it.
The IRS taxes Restricted Stock (stock that vests over time) using a “pay me now or pay me later” method. By filing an 83(b) Election Form, you are telling the IRS that you want to pay them now. The IRS requires that you put this in writing and mail them the form within 30 days of signing the stock grant.
The form tells the IRS that you will include the difference between the fair market value of your Restricted Stock minus the amount that you paid for this stock as taxable income on your personal income tax return in the year of the grant.
Keep in mind, the fair market value is not reduced by the fact that the stock vests over time.
If you are granted your Restricted Stock shortly after the Company is incorporated, the fair market value is very low and you do not pay much for the stock. So, the amount that you include as taxable income on your personal income tax return is probably $0. If you pay nothing for the Restricted Stock, the amount reported as taxable income is the small difference between the fair market value and the amount paid ($0) for the Restricted Stock.
An 83(b) Election Form typically works best early in the Company’s life cycle when the valuation is low. If the valuation is high, say due to a financing, and the Company requires payment for the Restricted Stock, you may not have the available funds to purchase the stock. If they grant it to you for $0, then you need to include the difference between the fair market value of the Restricted Stock and the amount that you paid ($0) as taxable income. You would then pay income taxes on this amount and the amount of taxes may be significant.