Understanding 83 b: The Crucial Tax Election for Founders

Q: What is the purpose of an 83(b) election?

It allows founders to pay taxes on the stock&#039;s value at the time of purchase, potentially avoiding higher taxes later.

Q: What happens if I miss the thirty-day deadline?

If you miss the deadline, you cannot file the election, and you will be taxed at each vesting milestone instead.

Q: Can I revoke my 83(b) election?

No, once filed, the election cannot be revoked.

Q: Is the 83(b) election applicable to all stock types?

No, it specifically applies to restricted stock that is subject to a vesting schedule.

Q: How can I file an 83(b) election?

You can file the election by completing the necessary form and submitting it to the IRS within thirty days of stock receipt.

Definition & Meaning

An 83(b) election is a tax provision that allows founders of a company to choose to be taxed on the fair market value of their stock at the time of purchase, rather than when the stock vests. This election must be filed within thirty days of receiving the stock. By making this election, founders can avoid significant tax consequences that may arise when the stock vests over time, as they recognize income upfront instead of at each vesting milestone.

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Legal Use & context

The 83(b) election is primarily used in the context of corporate law and taxation. It is particularly relevant for startup founders and employees who receive restricted stock as part of their compensation. This election is crucial in preventing potential tax burdens that could arise from the appreciation of stock value over time. Users can manage the filing of this election through legal forms provided by services like US Legal Forms, which offer templates drafted by attorneys.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A founder receives 1,000 shares of stock in their startup, valued at $10 per share. By filing an 83(b) election, they report $10,000 as income immediately. If they do not file, they will be taxed on the value of the shares as they vest, which could be significantly higher if the company grows.

Example 2: A software engineer receives restricted stock that vests over four years. If they file an 83(b) election, they will pay taxes on the initial stock value rather than on the potentially higher value at each vesting date (hypothetical example).

Comparison with related terms

Term	Definition	Key Differences
83(b) Election	A tax election to recognize income upon stock purchase.	Filed within thirty days; impacts tax treatment of stock.
Restricted Stock	Stock that is subject to vesting conditions.	Does not involve tax election; taxation occurs at vesting.
Stock Options	The right to purchase stock at a set price.	Different tax implications; options are not automatically stock.

Common misunderstandings

What to do if this term applies to you

If you are a founder or employee receiving restricted stock, consider filing an 83(b) election to minimize your tax burden. Ensure you complete the election form and submit it within thirty days of receiving your stock. For assistance, explore US Legal Forms for templates that can help you navigate this process. If your situation is complex, consulting a tax professional or attorney may be beneficial.

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Quick facts

Filing deadline: Within thirty days of stock receipt.
Tax implications: Income recognized at purchase, not at vesting.
Potential penalties: Increased tax liability if the election is not filed.

Key takeaways

Frequently asked questions

What is the purpose of an 83(b) election?

It allows founders to pay taxes on the stock's value at the time of purchase, potentially avoiding higher taxes later.