What is an 83B Election?

With an 83B election, you can pay taxes, at ordinary tax rates, on the total market value of your equity grant at the start of your vesting agreement. You’ll be able to do this instead of paying taxes on it annually. Put simply, once you own your company’s restricted stock, you’ll have the opportunity to pay taxes on it immediately, rather than in installments over time. 

If your stock increases significantly, you won’t be required to pay annual taxes unless your company goes public, merges with another firm, gets bought or there is a sale. When the stock is “sold” you are taxed at Capital Gain rates.  Essentially, an 83B election offers an effective way to make the most out of your stock compensation. 

Benefits of an 83B Election

The most noteworthy benefit of an 83B election is the fact that it can save you a great deal of money on taxes. Of course, your particular situation will determine exactly how much tax savings you’ll enjoy. Understand that if you’re a startup that isn’t worth much at the current moment, an 83B can only benefit you. You won’t have to worry about paying more in taxes if your stock prices go up. 

Drawbacks of an 83B Election

It’s important to note the major risk of the 83B. Since your stock prices do have a chance of going down in value, you may lose money even though you’ll save on taxes. That’s why 83B is ideal if your company has a lower valuation. In addition, if you decide to leave your company before your restricted stock vests, you’ll miss out on the tax money you paid on any invested shares when you initially filed your election. 

How to File an 83B Election

You must file an 83B election within 30 days of the date your stock was issued. To do so, follow these steps:

1. Fill out an 83B election form and cover letter. You can find templates online or reach out to our team to create one for you.
2. Make three copies of the signed form.
3. Send the form and cover letter to the appropriate IRS office. The IRS website will inform you of where to mail them to. 
4. Send your company a signed form.
5. Keep the last signed form with the receipt for your records.

Interested in an 83b Election? Contact GrowthLab Today

At GrowthLab, we help small businesses like yours succeed. We can guide you through the process of an 83B election so you can save on taxes, protect your company financially, and set yourself up for success. Contact us at 888.673.8481 for more information!