Many individuals are interested in making the 83(b) election to minimize long-term tax due. However, this may or may not be a good choice for you. I will not go through the analysis and pros/cons of such a choice in this post. This is for information purposes on the mechanics of making the election.
Before making the election, it is important to understand whether your stock option agreement allows this. Your company should share an 83(b) election form with you, if you are eligible for this. You can also look at your stock option plan documents to see if it allows for accelerated vesting of your options.
You need to review your agreement to ensure it allows accelerated vesting. This gives you the choice to exercise your option and buy your stock now to show the stock was transferred to you and is in your control. You will likely still have restrictions on the stock in case of separation with your company.
Please review your stock option agreement and talk to your finance department to find out if you are eligible for this election.
Now on to the mechanics of Completing the 83(b) Election your company provided!
First: Pay your Company for the shares
The first thing you should know about making the 83(b) election is that you must elect to accelerate your vesting and pay for your shares first. Paying for your shares shows you own the stock and the risk of forfeiture is sufficiently minimized from the IRS’ perspective. Once you own the shares you may now make an election on your shares.
Next: Completing the 83(b) Election form
The election form is generally provided by your company (or their attorney). This form asks for your personal information and information on the shares you wish to elect this treatment for. The election must be made within 30 days of receipt of the shares.
The fair market value of the shares is generally the most recent 409(a) valuation or Series funding value for non-publicly traded companies. This is something you should ask your company for.
Gross income is the total fair market value less the amount you paid for your shares. This amount is something you may owe taxes on, depending on the situation. Ask your company if they withhold taxes due via payroll for your election, or if you will be personally responsible for them.
Once the form is complete, it’s time to prepare all the paperwork!
Cover Letter and Copies, copies, copies
Preparing to file the 83(b) election requires a bit of paperwork. This paperwork ensures you have proof of the election if it is lost at a step in the process: on the way to the IRS in the mail, at the IRS office, etc.
You will need to create a cover letter for the election (sample here) or provided by your employer). The cover letter will tell the IRS that you’d like a copy of the election stamped as received, and sent back to you in the mail. This ensures you have proof the IRS received your election request. Make sure you include a copy and a self-addressed, stamped envelope for ease.
To the IRS
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- Cover Letter
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- Original signed 83(b) Election Form
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- Copy of signed 83(b) Election Form
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- Self-addressed and stamped envelope for returning confirmation to you
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- Send to the IRS via your IRS home office location (where you file your Form 1040). Take the package to the U.S. Post Office and attach a Certified Return Receipt (example here). This receipt will serve as proof of the post-stamp date in case the IRS claims you did not send it within the 30 day period. Keep this for your records.
To your employer
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- Check for shares (already should be with them – but double check you did this!)
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- Copy of Cover Letter
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- Copy of signed 83(b) Election
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- Copy of Certified Return Receipt
For your records
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- Original signed 83(b) Election Form
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- Original Certified Return Receipt
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- Copy of Cover Letter
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- Copy of Check for Shares
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- Stamped IRS returned copy of signed 83(b) Election Form (once you receive it in the mail)
This post does not include a discussion on the pros and cons of making an 83(b) election. This post is for informational purposes on the mechanics of the election. Discuss whether making the 83(b) election makes sense for you with your accountant or financial advisor.
Where are you in your start-up adventure?
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- Looking for more information on how to negotiate your next compensation package?
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- Evaluating your current company offers?
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- Or are you exercising stock options?
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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.
