83(B) Elections
83(B) Elections are a little-known tax savings strategy for founders and shareholders. Before you issue or acquire shares of equity in a company, it’s important to talk to an expert team about how you can enjoy this tax benefit. The time frame to opt in is very brief, and once the 30-day window to file your 83(B) paperwork is up, you’ll have missed a valuable opportunity, and will be spending extra tax dollars on your investment.
Benefits Of Filing An 83(B) Election Might Include:
LOWER TAXABLE VALUE OF SHARES
Pay upfront taxes for an ultimately lower tax rate since the values of the shares are low.
DECREASED CAPITAL GAINS TAX LIABILITY
Start your capital gains holding period on the date of issuance. Long-term capital gains have a lower tax liability.
TAX-FREE FOR REMAINDER OF VESTING AGREEMENT
Don't pay taxes on stocks as they vest over the term of your agreement.
WHAT IS AN 83(B) ELECTION?
An 83(B) election allows you to pay upfront taxes on stocks before they vest. When a company is first launched, the value of the shares is likely much lower than it will be at each subsequent anniversary of the shares being issued. This means you will be paying a much lower tax bill at the outset than you would be in subsequent years as the value of your shares increases over time. Filling an 83(B) election for stocks at the time of issuance can be an excellent, tax-efficient strategy.
When should I file for my 83(B) election?
If you are asking this question, you’ll want to contact our team as quickly as possible so we can discuss the pros and cons of this election. You must file your form 83(B) within 30 days of receiving the shares, without exception. If you fail to file the paperwork with the IRS and complete your tax payment, you’ll miss out on potential tax savings.
What are the risks of filing an 83(B) election for shares in a startup?
When you plan to own unvested shares in a company, you don’t actually own the stocks. Your stocks vest over time. Most typical plans have shares vesting at the one, two, three, and four year marks, with a one year cliff before the stocks are truly yours. Hopefully, over this time, your investment will have grown, which is why it is often ideal to pay taxes on the day you receive your shares instead of waiting until they vest. There is always the risk that your shares will be forfeited if you were ever to leave the company, or the startup fails. The risks of filing 83(B) elections for a startup are often fairly low compared to the potential benefit of paying a very low up front tax cost. Our team will help you evaluate the scenario from all angles and provide recommendations about whether or not filing an 83(B) election is the best path forward.
What are the risks of filing an 83(B) election for shares in an established company?
If you are offered unvested shares in a later-stage company, it is even more important to evaluate the effectiveness of an 83(B) election. If you elect to pay your taxes up front on your unvested stocks now, you could be paying a higher rate than you might be paying in a year when the stocks start to vest. Further, because the value of an established company’s shares are likely higher than the value of a startup company’s shares, we’ll want to evaluate whether or not the pre-payment of taxes is a strong use for your liquid cash stores. Our team will help you examine the company’s history, their trajectory, and help you make an informed decision.
Ask us about the advantages of 83(B) elections.