A New Form Section 83(b) Election: IRS Form 15620

As part of US tax planning for founders, employees, board members, and other individual service providers who receive equity that is subject to vesting in connection with their services, Section 83(b) elections are frequently used to potentially reduce future taxes on such equity. Because Section 83(b) elections can significantly affect the timing of income recognition, tax liabilities and deductions, and overall tax strategy, it is important to understand how a Section 83(b) election works and how the new IRS Form 15620 can be used to make the election.

Overview of a Section 83(b) Election

Section 83(b) of the Internal Revenue Code (IRC) allows taxpayers to elect to include the value of certain unvested property (e.g., shares of stock, LLC or partnership interests, etc.)¹ received in connection with the performance of services in their gross income before the equity vests. The election must be made within 30 days of the transfer of the equity to the employee or other service provider.

A Section 83(b) election can be advantageous if the equity is expected to appreciate in value because it allows the taxpayer to recognize income, if any, at ordinary income rates at the time of grant rather than at the time of vesting (when, presumably, the value would be higher).² This can result in lower tax rates on the future appreciation of the equity, especially if the equity appreciates significantly over time, because a Section 83(b) election commences the capital gains holding period.

Key Considerations for 83(b) Elections

1. Timing of election: A Section 83(b) election must be filed with the IRS within 30 days of the equity transfer. If this deadline is missed, the taxpayer will not be able to make the election and income will be recognized as the equity award vests.
2. Tax implications:
   
   1. Immediate taxable event: By making the election, the taxpayer chooses to recognize ordinary income based on the fair market value of the equity at the time of the transfer over their cost basis. Taxation at the time of vesting of the equity should be avoided; therefore, future appreciation in the equity’s value will generally be taxed upon sale or disposition at capital gains rates (short-term or long-term). In certain circumstances, federal income tax upon a future sale or disposition can be potentially avoided, as well.³
   2. Risk of loss: If the taxpayer later forfeits the equity before it vests (e.g., if employment ends), they are not entitled to a refund of the taxes already paid on the equity’s value.
3. Asset types: The Section 83(b) election applies to unvested equity, such as shares of common stock or LLC or partnership interests, granted to employees or service providers that are subject to vesting or other punitive repurchase or forfeiture provisions. The election does not apply to cash compensation or other forms of remuneration.
4. Recordkeeping and documentation: Proper filing and recordkeeping of the 83(b) election and evidence of mailing is crucial. The IRS requires that the form be filed with the IRS office to which the taxpayer mails their annual tax return. Further, it is critical to maintain a clear record of such mailing. Accordingly, taxpayers are advised to send their Section 83(b) elections via certified mail, with a return receipt requested.

IRS Form 15620: A New Standard Form for Section 83(b) Elections

IRS Form 15620 was recently published to aid taxpayers who wish to file a Section 83(b) election.⁴ It incorporates the requirements of Treasury Regulations Section 1.83-2 and IRS Revenue Procedure 2012-29 into a standard form of election. Taxpayers may continue to file Section 83(b) elections on alternative forms prepared by tax professionals, but the new Form 15620 is intended to streamline the filing process. It also may pave the way for filing Section 83(b) elections electronically with the IRS in the future (though for now, filing by mail is still required). If used, Form 15620 must be submitted to the IRS, and a copy must be provided to the employer or issuer of the equity.

Action Items for Employers and Employees

• For employers: Ensure that founders, employees, board members, and other service providers (e.g., advisors, independent contractors, and consultants) who receive equity that is subject to vesting are aware of the Section 83(b) election and its potential benefits and risks, and the availability of Form 15620. Employers should track the 30-day deadline to file the Section 83(b) election and whether filings have been made and keep (for their records) proof of timely filing with the IRS.
• For employees and other individual service providers: Upon receiving unvested equity compensation, consider whether making a Section 83(b) election is appropriate for your financial situation. Be mindful of the 30-day filing deadline after transfer to ensure your election is valid. Given the complexities of a Section 83(b) election and its potential tax consequences, you are strongly encouraged to consult with your tax advisors to determine whether to file a Section 83(b) election.

Takeaways

Section 83(b) elections can provide significant tax benefits for those receiving equity that is subject to vesting, but they must be carefully considered and executed within the required time frame. If filing a Section 83(b) election is advantageous, taxpayers should consider using Form 15620 to ensure that all applicable requirements of a Section 83(b) election are satisfied.

This client alert is for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor for advice regarding your specific circumstances.

 

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^[1] Although the IRC uses the word property, for sake of ease we will refer to property herein as “equity.” Notably, however, stock options and restricted stock units (RSUs) do not qualify as property or equity for this purpose; therefore, a Section 83(b) election may not be made with respect to stock options or RSUs.
^[2] In an ideal situation, a Section 83(b) election would be made when there is no difference between the purchase price paid for the equity and current fair market value of the equity, which would mean that there should be no ordinary income event upon filing the Section 83(b) election.
^[3] Noncorporate purchasers of qualified small business stock (QSBS) may be able to exclude from their federal gross income all or a portion of the gain recognized when they sell QSBS after a five-year holding period. There are many requirements (at both the stockholder level and the corporate level) that must be satisfied for a company’s stock to qualify as QSBS and produce eligible gains exempt from federal income tax. Among others, these requirements include (i) that the issuing corporation’s gross assets (measured by tax basis) may not exceed $50 million at any time prior to and immediately after the stock issuance (the gross asset test), and (ii) that at least 80% of the issuing corporation’s assets (measured by value) are used in one or more qualified trades or businesses during substantially all of the investor’s holding period for the stock (the active business test). For an in-depth discussion of QSBS or questions regarding any particular QSBS issue, please contact a member of Goodwin’s tax department.
^[4] IRS Form 15620 can be found here.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.