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Everything you need to help you launch your new business entity from business entity selection to multiple-entity business structures.
Designed for rental property owners where WCG CPAs & Advisors supports you as your real estate CPA.
Everything you need from tax return preparation for your small business to your rental to your corporation is here.
WCG’s primary objective is to help you to feel comfortable about engaging with us
Posted Sunday, September 30, 2018
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An 83b election is a letter you send to the IRS electing to be taxed on the day the stock was granted to you, versus when the stock vests. This might not seem like a big distinction, but it can be huge. The distinction lies in the difference between ordinary income tax rates and long-term capital gain rates.
Assumptions-
An 83b election must be filed within 30 days of the grant date, and this is usually the date the board of directors announces the grant. It might be several days later before the employees are aware which eats into the 30 day limitation.
The IRS will stamp the letter and mail it back to you. This letter is now worth a lot of money if you need to present it to the IRS later during an examination. Treat this like gold. Put it in a freezer and then put the freezer inside of a safe. Conversely, perhaps a safe fits better in a freezer.
Ordinary income tax on $1,000 and capital gains tax on $499,000.
Using the same example above, the math changes to your detriment.
Ordinary income tax on $100,000 and capital gains tax on $400,000. Note the difference from above.
Comparing these two examples results in a $19,000 tax savings by filing the 83b election assuming you are in the 39.6% marginal tax rate. The timing of the tax hit is also critical. At the time of grant, the tax bill was $396 with the 83b election without a tax hit at vesting. Conversely, without the 83b election the tax hit was delayed until vesting, but was $39,600 at a time when you might not have the cash laying around. And you don’t want to be forced to sell it early especially if it rocketing in price.
The 83b election also starts the holding period earlier, at the grant date.
Most employees file the 83b election. But there might be a time when that doesn’t make sense. For example, if the same shares were worth $100,000 at grant date, filing the 83b election would immediately cause a $39,600 tax obligation (again assuming you are in the 39.6% marginal tax rate). It could get worse- the company’s stock could fall in price prior to vesting, you might have tremendously overpaid taxes.
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Tax planning season is here! Let's schedule a time to review tax reduction strategies and generate a mock tax return.
Tired of maintaining your own books? Seems like a chore to offload?
Did you want to chat about this? Do you have questions about 83b Election Basics? Let’s chat!
The tax advisors, business consultants and rental property experts at WCG CPAs & Advisors are not salespeople; we are not putting lipstick on a pig expecting you to love it. Our job remains being professionally detached, giving you information and letting you decide within our ethical guidelines and your risk profiles.
We see far too many crazy schemes and half-baked ideas from attorneys and wealth managers. In some cases, they are good ideas. In most cases, all the entities, layering and mixed ownership is only the illusion of precision. As Chris Rock says, just because you can drive your car with your feet doesn’t make it a good idea. In other words, let’s not automatically convert “you can” into “you must.”
Let’s chat so you can be smart about it.
We typically schedule a 20-minute complimentary quick chat with one of our Partners or our amazing Senior Tax Professionals to determine if we are a good fit for each other, and how an engagement with our team looks. Tax returns only? Business advisory? Tax strategy and planning? Rental property support?
Everything you need to help you launch your new business entity from business entity selection to multiple-entity business structures.
Designed for rental property owners where WCG CPAs & Advisors supports you as your real estate CPA.
Everything you need from tax return preparation for your small business to your rental to your corporation is here.
WCG’s primary objective is to help you to feel comfortable about engaging with us