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IRS 83(b) election

Not my strong suit here...

Start-up private company. Currently not funded, so corporate officers get stock grants with a 4 year vesting schedule, with an immediate 25% vested. (Does this make it restricted stock?)

My understanding is that as soon as you get vested (sign your contract) you file an 83(b) and declare that there is no determinable value to the stock.

You don't pay any income tax until you sell your stock and if after one (1) year after final vestment it is all long-term capital gains.

Is this correct?

What if the company has been funded with $10M in the bank but has not started operations?

What if it's an LLC where two of the GP's put up cash and the third GP vests to equal equity and profit/loss after 3 years, is an 83(b) election needed?

Answers

Dale Bolen
Title: VP Accounting
Company: C.R. Laurence Co.
(VP Accounting, C.R. Laurence Co.) |

Its been awhile since I've filed Sec 83(b) elections, so reply won't capture all the nuances, but...

The purpose of the election is to accelerate taxes prior to vesting / option exercise. the logic is counter to tax planning for more typical transactions where one wants to defer taxes.

For something like founders shares or early-stage options, the current value would be negligible. Thus, paying ordinary income tax now on ~$0/nominal value will be less than paying tax on the future - and presumably higher - value of shares when they vest or gain on options when exercised. Any future gains after the 83(b) election would then be capital gains at rates lower than ordinary income rates.

Only that third partner can determine if he/she wants to take a tax hit now. Obviously, there will be complexities to determining the value of his interest in the LLC.

Hope that helps.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

If I understood correctly...

The tax hit of the 3rd partner who puts up no money if they take the 83(b) election is zero in year 0 (stock is received) until sale.

There are no phantom income while holding stock, just regular income from operations (K1).

The the basis of the stock is $0 and whatever they sold it for is 100% LT Capital gain...

Thanks Dale

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