Save Tax on Restricted Stock Awards with the Section 83(b) Election
posted Nov 1, 2018 by Paul Oliveira, CPA in the Global Tax Blog
Did your company recently grant you restricted stock as part of your compensation package? When you’re given equity in a company as part of compensation, you are required to pay taxes on it just as you would on any other cash compensation that you receive. Luckily there’s an opportunity to save tax. Consider the section 83(b) election.
What is restricted stock?
Restricted stock is stock that’s granted to employees as part of their compensation package. The stock award is considered restricted because it is subject to vesting. In other words, the stock cannot be fully transferred to employees until certain vesting conditions have been met. These conditions often include continued service to the company or reaching certain performance goals. Once the stock vests, you generally are subject to tax on the stock’s fair market value at your ordinary-income rate as of the date when the vesting restrictions lapse.
Benefits of Section 83(b)
As an alternative to paying tax on the fair market value of the stock on each vesting date, you might consider making a Section 83(b) election. This election can be advantageous if the stock is likely to appreciate significantly from the time that it is initially granted. Why? The election allows you to be taxed on the value of the stock when initially granted, when presumably its value is at a low point. In this way, you may be able to convert future appreciation from ordinary income to long-term capital gains income.
Let’s say your company grants you stock that is subject to a 5 year vesting schedule and you are not required to pay anything for the stock awarded to you. You would typically be taxed each year on the fair market value of the shares that vested during the year. Ideally the value of the stock will rise during this 5 year vesting period, in which case, however, you will be paying an increasing amount of tax each year as you vest in the stock.
But a Section 83(b) election could be a good strategy in preserving more of that appreciation in value occurring during the vesting period as capital gain when you dispose of the stock.
Cons of Section 83(b)
By taking the Section 83(b), you are required to prepay tax in the current year, which could push you into a higher income tax bracket. This could also increase your 0.9% Medicare tax obligation.
Furthermore, taxes you pay as a result of the election cannot be refunded if you forfeit the stock down the road or sell it at a lower value.
Making the Section 83(b) election
Within 30 days of the grant date, you must file your election with IRS. The 83(b) election allows you to pay taxes on the total fair market value of restricted stock at the time of granting.
Did the TCJA impact the 83(b) election at all?
Under the Tax Cuts and Jobs Act (TCJA), individuals who make Section 83(b) elections are no longer required to file a copy of the written election statement with their income tax returns. However, the TCJA does not change the requirements under Section 83(b) to file the election with the IRS no later than thirty days after the grant date.
Were you recently awarded restricted stock? We can help you determine whether the Section 83(b) election is right for you. Reach out to us today.
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