83(b) Election - What to File and When?

Today I’m answering the question, what is an 83(b) election, and how and when to file?  If you want to save on your business taxes, this is a must-read.

What is an 83(b) Election? 

The 83(b) election is a formal letter that you send into the IRS telling the IRS that you are electing to buy your stock immediately, even if it hasn’t all vested yet, and you are looking to lock in a low tax basis. 

Therefore, all appreciation after you’ve filed an 83(b), and after you bought that stock, is going to be taxed at a capital gains rate, which is about 20%. 

If your company IPOs someday, you are going to have a huge gain, and will only have to pay capital gains tax. 

What if you don’t file an 83(b)?

If you forget or just don’t send in an 83(b) election form, you will have to pay income tax on the delta of appreciation every year as the stock vests. So if a stock goes up in value after the first year or two, you are going to have to pay income tax on that appreciation. And income tax rates are somewhere between 30 and 40%. 

So there’s a really big delta there. You are talking about a lot of money, especially if your company gets bought or IPOs. 

When and How to File an 83(b) Election:

You only have 30 days to elect an 83(b) so do it right away, ideally the day your company is incorporated. Your trusted tax professionals can help you. 

Fill out that 83(b) election form that was provided to you, and mail it in to the IRS with certified mail to have proof that you sent it in. 

In closing, filing an 83(b) form is worth it. Again, make sure to file within the allotted time frame. This will ensure that your company gets favorable tax treatment.