What is an 83(b) Election?

what is an 83b election

Every founder and investor in an acclerated growth startup should know about the 83(b) election. As a baseline, you are taxed on any equity compensation that you receive when it is transferred to you in the same way that you are taxed on your other income. The IRS requires you to pay taxes on that equity compensation in the year that it is actually transferred to you. Since founders' stock is typically subject to incremental vesting over a number of years, by default, the founder would incur tax liability for the value of the stock at the time it vests. Over the course of the vesting schedule, the value of the stock at the time of vesting could continue to increase (or fluctuate) so that the founder pays more taxes over time.

The Internal Revenue Code created an attractive option for startup founders with Section 83(b) of the Internal Revenue Code. The 83(b) election provides founders with the option to be taxed for the entire amount of stock that is subject to vesting at the present value, which may be fairly nominal. By making an 83(b) election, you pay tax when you receive the stock, but not when it vests. You’ll also report capital gain or loss when you sell the stock. Within 30 days of a founder’s purchase of stock in a corporation or LLC, the founder must make a decision as to whether or not to make an election under Section 83(b) of the IRC. 

Consider making an 83(b) election in the following cases (this list is non-exhaustive):

  • You expect steady growth in the value of the stock and forfeiture is unlikely; and
  • The potential for increased value of the stock is great, while the amount of income you’ll report at the time you make the election is small.

After you have formed your entity...

After you have formed your entity, and if you desire to make the 83(b) election, you will have 30 days to file the election from the time you sign the stock purchase agreement and purchase your initial ownership stake in the company. An 83(b) election letter to the IRS is generated with step-by-step filing instructions when you purchase the Delaware Post Incorporation Documents package from Startup Documents.

Again, If you have stock that is not subject to any vesting and is granted without restrictions, then the 83(b) election does not apply and your stock would be counted on the current year's tax return.

Separately, you should also know about the Delaware Franchise Taxes and Annual Reports. We generate the next steps required with forming and maintaining your company in the startup checklists that are generated for you when you incorporate in Delaware or purchase Delaware Post Incorporation Documents using Startup Documents. 

If you have any questions or doubts about this election, you should consult with an experienced tax advisor. 

You can learn more about the contents of an 83(b) election and the benefits of the election, including whether it applies to you, by visiting the IRS site.

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