Named for the Internal Revenue Code section that authorizes it, the Section 83(b) election is made only (1) when you want to be taxed (federal, Social Security, Medicare, and any state or local taxes) on the value of restricted stock at grant rather than vesting; or (2) when you exercise stock options that are exercisable before vesting (very rare in public companies).
Alert: A Section 83(b) election must be filed with your local IRS office within 30 days after your receipt of restricted stock (or your stock option exercise). The filing can arrive just after 30 days have elapsed if the mailing is postmarked within the 30-day period. If the 30th day falls on a weekend or a holiday, the deadline is the next business day.
You also pay taxes at the time of your Section 83(b) election. Before you make the election, it's important to understand both the risks and the situations when it might be beneficial. Your company will have some type of procedure for collecting the withholding taxes. The income you recognize at grant, and the withholding, should appear on your IRS Form W-2.
What To File With The IRS
Although there are hundreds of formal IRS tax forms, no official form exists for making the 83(b) election. Your company may have developed a sample form for restricted stock grants (see an example from the law firm Pillsbury Winthrop Shaw Pittman). In Rev. Proc. 2012-29 (see page 9), the IRS presents some sample (not required) election language that would satisfy the IRS regulations. The model form presented by the IRS does not make any substantive changes to the requirements under current regulations. It simply illustrates the current requirements. You make the election by sending to the IRS office where you file your return the appropriate information, which includes:
- your name, address, and Social Security number
- a description of the property/shares (e.g. X shares of my company)
- the date on which you received the shares and in what taxable year
- the restriction that will cause forfeiture if it is not met or the restriction that will lapse when vesting requirements are met
- the fair market value of the property, without the restriction, at the time of grant
- any money paid for the stock
- the amount to include in gross income (FMV minus anything paid)
Alert: Incomplete elections, i.e. those not including all of the required details on the transactions, are invalid. After you make a timely election with your local IRS office, (1) give a copy of the election to your company and (2) attach a copy of the document when you file your income tax return for that year (on the basis of proposed IRS regulations, this requirement will probably end for grants made from 2016 onward and may be informally ended for 2015 grants and property transfers). Experts believe a valid election still exists even if you mistakenly did not make the tax-return filing. (See IRS Letter Ruling 201405008 and IRS Letter Ruling 201438006.) Otherwise, this would give you the opportunity to revoke an election beyond the limited period when doing so is permitted (see the related FAQ on revocations).
A survey in 2013 by the National Association of Stock Plan Professionals found that 16% of the responding companies discourage the Section 83(b) election, and 15% actually prohibit it. The same survey also found that 26% of companies will help an employee with a Section 83(b) election, and 52% provide employees with information about the election.