TECH COMPANY COMPENSATION: UNRAVELING THE MYSTERY OF THE
83(B) ELECTION By Robert Gosart, CPA | Director - Tax
M
ost technology companies offer stock-based compensation. If you are an employee that can benefit from a company that does, you probably have heard of the 83(b) election.
The basic premise of Internal Revenue Code Section 83 is simple. It states that if you receive property in exchange for services, the difference between the value of the property received (stock), and what you paid for it, if anything, is taxable income (generally wages). However, if you receive the stock subject to a restriction (like a vesting schedule), then the taxable event occurs later when the restriction lapses (when the stock becomes vested). Any change in the stock’s value during this time will either increase or decrease the taxable event when the restriction lapses. This is when Section 83(b) can be utilized to your benefit or detriment. If you think the value of the stock will increase while you wait, which most people do, then 83(b) allows you to accelerate the taxable event and include the income on the earlier exercise date, before the date of restriction lapses. When the restriction lapses, there is no taxable event, and any appreciation in the stock from the exercise date is a capital gain. If held for more than a year, it is taxed at the lower long-term capital gains rate when sold. The detriment is if the stock goes down, then you have a capital loss that can be deducted only to the extent of capital gains. The employee gets no refund of taxes paid on the earlier exercise date. The 83(b) election is made by mailing the IRS a signed statement within 30 days of the date the restricted property is received. A copy should also be attached to the employee’s tax return for the tax year when the election is made. The most common forms of stock-based compensation are restricted stock awards (RSAs), restricted stock units (RSUs), nonqualified stock options (NSOs), and incentive stock options (ISOs). THIS IS HOW SECTION 83(B) APPLIES TO EACH ONE:
RSAs: These are shares of stock that an employer transfers to an employee (the grant date), usually at no cost, subject
to a vesting schedule. The default taxable event is the value of the shares on the later vesting date when the vesting
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KROST QUARTERLY VOL. 3 ISSUE 1 - THE TECHNOLOGY ISSUE
