Apr 9, 2015
When And How To Make An 83(B) Election
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When And How To Make An 83(B) Election
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Differences between ISOs and NSOs
About The Author
Arushi Bhandari is an MBA and a licensed CPA in the state of California. She has helped several Silicon Valley startups at different stages with their accounting and tax related issues. Her publications eBooks - STARTUP Financing, Equity and Tax and Introduction to Equity Compensation are available on Apple iBookstore, Amazon Kindle and Google Play. She maintains a public blog at www.startuptaxaccounting.com especially aimed at startups, and has guest blogged at different startup platforms such as The Startup Garage and Belmont Acquisitions.
DISCLAIMER: The information provided is intended to educate the readers and a more definite answer should be based on a consultation with a lawyer or CPA. It should not be relied upon as legal advise because the information might be incomplete and answers could change depending upon circumstances and if all facts were known.
Consider the Sec. 83(b) election to save tax on restricted stock awards
Restricted stock is stock that’s granted subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk or you sell it. You then pay taxes on the stock’s fair market value at your ordinary-income rate.
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What Is An 83(b) Election And When Shouldn’t I Make It - Pt 2
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What Is An 83(b) Election and When Do I Make It - Pt 1
What’s an 83(b) election, and when is it a good thing to do? Great question, and one every entrepreneur, founder, contractor, or anyone else trading work for equity should know the answer to.
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Checklist and procedure for 83(b) Election Filing
It is the taxpayer's sole responsibility and not the company's to file the 83(b) Election.
File Form 83(b) as follows:a) Complete and sign TWO original copies of the 83(b) election form ( sample Exhibit D) including your spouse's signature if you are married in a community property state. b) Make 4 photocopies of the original signed 83(b) form - two for the IRS, one for the company for its records and one for your/taxpayer's records. c) Attach a cover letter ( sample attached) addressed to the taxpayer's regional IRS office d) Send the following via US Certified Mail Return Receipt requested to the IRS within 30 days of the date of purchase: i) Cover letter ii) "One" originally signed 83(b) form iii) Self - addressed envelope iv) Two photocopies of the signed 83(b) form - The IRS will acknowledge receipt by date-stamping these and returning them to the taxpayer in the self addressed envelope. As a proof of filing, retain the following: 1) a copy of the second signed 83(b) election form for your records from step a) above. 2) green date stamped Certified Mail receipt card 3) IRS date stamped copy of the 83(b) election form when returned from step iv) above.
About The Author
Arushi Bhandari is an MBA and a licensed CPA in the state of California. She has helped several Silicon Valley startups at different stages with their accounting and tax related issues. Her publications eBooks - STARTUP Financing, Equity and Tax and Introduction to Equity Compensation are available on Apple iBookstore, Amazon Kindle and Google Play. She maintains a public blog at www.startuptaxaccounting.com especially aimed at startups, and has guest blogged at different startup platforms such as The Startup Garage and Belmont Acquisitions.
DISCLAIMER: The information provided is intended to educate the readers and a more definite answer should be based on a consultation with a lawyer or CPA.It should not be relied upon as legal advise because the information might be incomplete and answers could change depending upon circumstances and if all facts were known.
Should an 83(b) statement be filed with the IRS for a foreigner or a founder with no SSN receiving stock or founder stock ?
An 83(b) election is a statement by any US taxpayer filed with the Internal Revenue Service within 30 days of the receipt of capital asset including stock saying that (s)he wants to be taxed on the transfer of property currently rather than when it vests. Foreigners are not liable for US taxes and hence an 83(b) filing is redundant. However, if there is a chance that the founder/foreign national would move to US to work for the start up then (s)he should :
1. Apply for ITIN in the meantime and 2. File 83(b) with the IRS.
To file an 83(b) an ITIN is needed. If (s)he does not have a valid ITIN/SSN or has applied for one then in the section of the 83(b) form where it asks for SSN write " applied for" or "awaiting" and not await receipt of the ITIN. This is because the ITIN usually takes 10-12 weeks putting the person out of the 30-day window. Note: If you purchased/received founder’s stock and there are " no restrictions" such as vesting, you DO NOT need to file an 83(b) Election Form.
To get an ITIN from IRS you need to have a good reason, else it would be denied. Its a good idea to file an 83(b) even though you have not applied for an ITIN. In such a case, (s)he should hold onto the IRS stamped/notarized 83(b) election form that (s)he get back from the IRS and file it with the paperwork when (s)he files for ITIN/SSN.
About The Author
Arushi Bhandari is an MBA and a licensed CPA in the state of California. She has helped several Silicon Valley startups at different stages with their accounting and tax related issues. Her publications eBooks - STARTUP Financing, Equity and Tax and Introduction to Equity Compensation are available on Apple iBookstore, Amazon Kindle and Google Play. She maintains a public blog at www.startuptaxaccounting.com especially aimed at startups, and has guest blogged at different startup platforms such as The Startup Garage and Belmont Acquisitions.
DISCLAIMER: The information provided is intended to educate the readers and a more definite answer should be based on a consultation with a lawyer or CPA.It should not be relied upon as legal advise because the information might be incomplete and answers could change depending upon circumstances and if all facts were known.
Which one is better - Restricted stock or Stock Options?
The choice between Restricted Stock and Stock Options is dependent upon circumstances and facts. Only after a careful review of each should one be selected over the other. Some of the differences between both which can help employees make the right choice(s) can be enumerated in terms of:
Valuation
Taxation and
409A Valuation
1.Valuation
Restricted stock always has some value at vesting even when the stock price falls below grant date price.
Example: Company grants an employee 2,000 shares of restricted stock when the fair value is $20. Considering a vesting schedule of 1 year cliff and fair value of $10/share on vesting date, the restricted stock is still worth $20,000 (2,000 shares * $10/share) to the employee.
Instead, if company granted 2,000 'stock options' with an exercise price of $20 and at vesting date the fair value is $10/share, there is no real value and the options are considered 'underwater' or worthless.
2.Taxation
Stock options aren't taxed until you exercise them. That way you can control when you pay taxes.
However, in the case of restricted stock you cannot control when they are taxed. You have to pay taxes in the year in which they 'vest', regardless of whether you sell them or not. Taxes are usually based on the fair value of the stock at 'vesting date' and NOT at 'grant date.' To minimize the risk of paying a huge tax bill when the stock vests (assuming an increase in company stock price in the year it vests), you can file an 83(b) within 30 days of grant. An 83(b) filing does not come without its drawbacks. If an employee leaves his/her job before shares vest, shares are forfeited and (s)he would have paid taxes at ordinary income rates for them. Also, if the fair value of stock declines IRS will not refund your payment.
3.409A Valuation
Most stock options require an expensive 409A valuation to determine the strike price. However, Restricted stock more easily avoids the need to seek independent and expensive appraisal .The feasibility of using restricted stock is based on a nominal valuation of the company.
Definitely restricted stock might have its advantages but since they are worth more to start with, employers give out fewer of them. Again, only after a careful review one should be selected over the other.
About The Author
Arushi Bhandari,CPA, MBA recently published an eBook “STARTUP Financing, Equity and Tax" with insights about the impact of JOBS Act & Dodd Frank Act on startup funding, terms like angel, accredited investors, venture capitalists, stock options, Restricted Stock, RSUs. It gives in depth examples & templates explaining documents like Term Sheet, Cap Table, Convertible Securities plus the importance of 83(b) filing.
Links to Download Arushi’s eBook Apple iBook: STARTUP Financing, Equity and Tax Kindle edition STARTUP Financing, Equity and Tax
DISCLAIMER: The information provided is intended to educate the readers and a more definite answer should be based on a consultation with a lawyer or CPA.It should not be relied upon as legal advise because the information might be incomplete and answers could change depending upon circumstances and if all facts were known.