The Internal Revenue Service has introduced a standardized form for taxpayers who are making an election under Section 83(b) of the Internal Revenue Code of 1986 to be taxed on the value of certain property when it is granted rather than as it vests. This change is aimed at simplifying the process for taxpayers and ensuring consistent reporting of these elections. The Section 83(b) election is an important tax tool for individuals who receive restricted property, such as stock, membership interests, LLC units or partnership interests, as part of their compensation for services. Here’s everything you need to know about the new form and its implications.
What is an 83(b) election?
An 83(b) election is a provision under the Internal Revenue Code that allows an individual to elect to pay taxes on the total fair market value of unvested restricted property at the time it is granted, rather than when it vests. This election can be beneficial if you expect that the property will both vest and increase in value over time.
After the 83(b) election is filed, any increase in the value of the restricted property will be treated as capital gains (rather than ordinary income, taxed at a higher rate) and taxed when the property is eventually sold. Filing the 83(b) election allows you to accelerate and pay tax on the property as of the grant date and start your capital gains holding period as of the grant date instead of the vesting date. Without an 83(b) election, any appreciation of the property between the grant date and vesting date is taxed as ordinary income as the property vests (and again as capital gains when the property is eventually sold).
What kind of property is eligible for Section 83(b) election?
Any equity or other property that is granted to you in consideration of the performance of services, where the fair market value of the property at the time of grant exceeds the amount you paid for it, is eligible. The property must also be subject to a substantial risk of forfeiture and be non-transferable at the time of grant. Note that stock options are generally not eligible for an 83(b) election.
When do I file an 83(b) election?
You must file an 83(b) election within 30 days of receiving the restricted property. This deadline is strict and cannot be extended. The election must be hand signed in ink and the original mailed to the IRS at the service center where the recipient’s taxes are filed, and, in most cases, a copy should also be provided to the taxpayer’s employer. Taxpayers are advised to retain copies of the election for their records. Once the 83(b) election is filed, it is irrevocable.
What happens if I don’t file an 83(b) election or if I fail to timely file my election?
If you don’t file an 83(b) election, or if you fail to file your election within 30 days of grant, you will not be taxed on the fair market value of the property on the grant date. Instead, you will be taxed on any appreciation of the property as and when the property vests, at ordinary income rates, based on its fair market value at that time. Though your tax burden is deferred if you don’t file the 83(b) election, it could result in a significantly higher tax bill if the property’s value has increased between the grant date and each applicable vesting date. Additionally, the value of the property at each vesting date is treated as ordinary income (taxed at a higher rate than capital gains). When the property is sold, any increase in the value of the restricted property between the vesting date and the sale date will be taxed as capital gains.
What happens if I file an 83(b) election but forfeit the property after grant?
If you forfeit the property after making the 83(b) election, you have already paid taxes on the value at the time of grant, even though you no longer own the property. In the event of a forfeiture, you do not have the ability to take a tax loss for the value of the property previously included in your income by reason of the 83(b) election.
Why did the IRS introduce a standardized form?
The IRS aims to simplify and streamline the process of making Section 83(b) elections by providing a clear and consistent format for all taxpayers. Previously, taxpayers were required to submit their own written statement containing specific details, which often led to errors and delays in processing. The new form reduces the risk of incomplete or incorrect submissions and ensures compliance with the election requirements.
Does the new form change affect me if I previously filed an 83(b) election?
No, the introduction of the standardized form does not retroactively impact elections made in prior years. If you have already filed an 83(b) election for restricted property granted in the past, this update does not affect you. While you are not required to use the new form, going forward, taxpayers making new elections should use the standardized form provided by the IRS.
Does Form 15620 modify any requirements under the Code?
No. All other requirements related to Section 83(b) elections remain in effect, including the requirement for the taxpayer to provide a copy of the election to the individual or entity for whom the services were performed in connection with the transferred property. The IRS plans to offer electronic filing of Form 15620 in the future.
Key Takeaway
The standardized form for Section 83(b) elections is a welcome change for taxpayers and tax practitioners. It simplifies compliance and minimizes errors in filing, making the process more efficient. However, taxpayers must still be mindful of the strict 30-day deadline for filing the election and consult with a tax professional to determine if an 83(b) election is the right choice for their situation.
Link to Form 15620: https://www.irs.gov/pub/irs-pdf/f15620.pdf
For more information, contact Jillian Benda Goldberg at or Hrideja Shah at , visit the IRS website or speak with a tax advisor.
