83b Election Basics

Posted Sunday, September 30, 2018

83b Election Basics

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-

  • 100,000 shares subject to vesting
  • $0.01 value per share at time of grant
  • $1.00 value per share at time of vesting
  • $5.00 value per share when sold

83b Election Filed

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.

  • When the stock is granted, it is worth $1,000 (100,000 shares at $0.01). You will pay ordinary income taxes on this amount. Done. No biggie.
  • When the stock vests, it is worth $100,000 but you pay nothing.
  • When you sell the stock, it is worth $500,000 and you will pay long-term capital gains with a basis of $1,000 provided you sold it one year after the grant date (as opposed to the vesting date).

Ordinary income tax on $1,000 and capital gains tax on $499,000.

No 83b Election Filed

Using the same example above, the math changes to your detriment.

  • When the stock is granted, it is worth $1,000 but your do not pay income taxes on this amount.
  • When the stock vests, it is worth $100,000 and you pay ordinary income taxes on this amount. Yuck.
  • When you sell the stock, it is treated the same as if you had filed the 83b election but the basis is $100,000.

Ordinary income tax on $100,000 and capital gains tax on $400,000. Note the difference from above.

83b Election Benefits

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.

wcg tax
Tax Planning Season

Tax planning season is here! Let's schedule a time to review tax reduction strategies and generate a mock tax return.

Tax Planning Services
tax strategist
Bookkeeping Services

Tired of maintaining your own books? Seems like a chore to offload?

Accounting Services

Professional Consultation

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?

accounting services for small business

Text WCG Offices

Need to get in touch through a quick text? We'll respond within a day.

accounting services for small business

Call Our Team

Need to speak to a tax professional now? Give us a call 719-387-9800 and we'll get you connected.

accounting services for small business

Chat With a Tax Pro

Taxes can be tricky. Chat with a WCG human now and get questions answered.

After almost 6 years with this CPA group, there is NO ONE else we would trust to do our taxes.

L. Matisek

See Review

We've worked with multiple bookkeepers and accountants over the years and WCG has completely blown us away.

N. Sellden

See Review

As a novice business entrepreneur they provided me with the tools to both structure and tax my business efficiently

Mayon Hight

See Review

They've made my taxes a breeze and are worth every dime I pay them for the peace of mind their services provide.

Lynn Shannon

See Review

The good folks at WCG have impressed me, as being highly competent, patient & friendly.

Fred LeBlanc

See Review

They've made my complicated business life simple and I'd recommend them to anyone with a slightly complicated-to-overwhelmingly complicated tax strategy!

Nic J

See Review

For nearly nine years, I have had the privilege of working with WCG and their team of exceptionally knowledgeable and experienced CPAs.

Alex Hickman

See Review

Amanda - WCG CPA - You guys have been invaluable in helping us get this business and tax planning setup properly and executed correctly.

Lance Dodd

See Review

WCG is extremely knowledgable, timely and attune to the unique aspects of our businesses.

Carl Protsch

See Review

WCG CPAs are professional and a pleasure to work with.

Nakapan P.

See Review

They go beyond the call of duties to assist me not only with Tax return matters but with any questions on other personal and company tax matters.

Juan Mayorga

See Review

I've always dreaded tax season, but WCG has made things so easy, even as we changed to an S corp. So happy we found them!

Paige de Kock

See Review

It was great to find an accounting firm eager to take on new clients, answer initial questions in depth, and support our “keep it simple” philosophy.

Stuart B.

See Review

Working with WCG was so easy, shout out to Sally Rhoades who handled my complicated tax situation this year wonderfully and was available for all my questions.

Stefani Cinto

See Review

I am so thankful to be a client of WCG CPAs & Advisors.

Carol Kersten

See Review

It's a wonderful and rare treat to find a company like WCG these days with their high level of service, personal approach, and deep knowledge of accounting.

Jeffree Hilton

See Review

Such a great firm. Great communicators, great attention to detail and overall great people.

Jeff Owens

See Review