Why, when, and how would I make a Section 83(b) election?
Named for the Internal Revenue Code section that authorizes it, the Section 83(b) election is made only:
(1) if 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).
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.
Given the risk of the election, a survey by the National Association of Stock Plan Professionals found that 16% of the responding companies discourage the Section 83(b) election for restricted stock grants, 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.
When To File
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. When the 30th day falls on a weekend or a holiday, the deadline is the next business day.
IRS Notice 2020-23 covered the extension of deadlines for numerous filings because of the Covid-19 pandemic in 2020. If your Section 83(b) election filing window was between April 1 and July 15 of 2020, the notice was interpreted as moving the filing deadline to July 15, 2020.
Alert: Through the end of 2021, the IRS temporarily allowed electronic or digital signatures for Section 83(b) elections as an alternative to handwritten signatures. It is not clear yet whether this allowance will continue. (For more on this development, see a commentary from the law firm Shearman & Sterling and an article in Accounting Today.)
What To File
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 in an SEC filing and, for early-exercise stock options, an example from Carta. 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. When you make a timely election with your local IRS office, you must also give a copy of the election to your company. You no longer need to attach a copy of the election document to your income tax return for the year in which you made the election. IRS regulations eliminated that requirement, starting with grants made in 2015 (see the related FAQ).