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What Happens If You Do Not File Section 83(b) Election?

What Happens If You Do Not File Section 83(b) Election?

10.12.2020 08:19 by Clemta

Section 83(b) election form is still a grey area in the minds of business owners and startups. People have strong doubts about what it is, how it is filled, and what are the benefits. Luckily, this text will answer all of your questions.

 

Section 83(b) Election is a provision under the Internal Revenue Service (IRS) that gives an employee, or founder, the option to pay taxes on the total fair market value of the restricted stock at the time of granting. Section 83(b) Election provides a tax benefit to shareholders of companies and startups which they have low share value, if form Section 83(b) is completed.

 

What is Section 83(b) Election?

Section 83(b) Election is a provision under the Internal Revenue Service (IRS) that gives an employee, or founder, the option to pay taxes on the total fair market value of the restricted stock at the time of granting. Section 83(b) Election provides a tax benefit to shareholders of companies and startups which they have low share value, if form Section 83(b) is completed.

 

How to Fill Out Section 83(b) election form?

  1. Go on Clemta.com and please sign up
  2. If you have a company, you can fill out to 83(b) election form
  3. If you don’t have a company, we can establish a company within minutes with Clemta.

What are the benefits of Filing Section 83(b) Election?

By filling this form, shareholders purchase stocks and pay taxes while their companies’ valuation is still low. Thus, they avoid the increase in taxes as their stock value rises. Otherwise; with the expansion of the company and its stocks being more valuable since taxes will be estimated according to increased value, shareholders would be paying much more tax. So; Section 83(b) Election provides taxation benefit, which means paying lower taxes for the stocks while their values are low.

 

Big Companies vs Small Businesses

For companies with high stocks, Section 83(b) Election has some risk. Because if the shares decline after a few years, Section 83(b) will be at a disadvantage. Therefore, Section 83(b) Election should be filled if it is considered to be an advantage for companies with high stocks.

As a result, if you do not file a Section 83(b) Election, you cannot benefit from the aforementioned tax incentive.

Happy to announce that Clemta.com offers a solution for this. With Clemta you can now file Section 83(b) Election! For more information on Section 83(b) Election through Clemta and how much it will cost you please contact us through one of our emails [email protected] or [email protected].

 

Examples of Benefits Filing Section 83(b) Election Can Provide

In each of the below examples, assume you receive 100,000 shares subject to vesting, worth $.01 per share at the time of grant, $1.00 per share at the time of vesting, and $5.00 per share when sold more than one year later.  We’ll also assume you are subject to the maximum ordinary income tax rate and long-term capital gains rate.  For simplicity, we will not discuss employment tax or state tax consequences.

Example 1 – 83(b) Election

In this example you timely file a Section 83(b) election within 30 days of the restricted stock grant, when your shares are worth $1,000.  You pay ordinary income tax of $370 (i.e., $1,000 x 37%).  Because you filed a Section 83(b) election, you do not have to pay tax when the stock vests, only on the sale.  On the sale (which occurs more than one year after the date of grant) you recognize a taxable gain of $4.99 per share (not $5.00, because you get credit for the $.01 per share you already took into income), and pay an additional tax of $99,800 (i.e., $499,000 x 20%).  Your economic gain after tax?   $399,830 (i.e., $500,000 minus $370 minus $99,800).

Example 2 – No 83(b) Election

In this example, you do not file a Section 83(b) election.  So you pay no tax at grant (because the shares are unvested), but instead, recognize income of $100,000 when the shares vest and thus have an ordinary income tax of $37,000.  On the sale (which occurs more than one year after the date of vesting) you recognize a taxable gain of $4.00 per share (not $5.00, because you get credit for the $1.00 per share you already took into income), and pay an additional tax of $80,000 (i.e., $400,000 x 20%).  Your economic gain after tax? $383,000 (i.e., $500,000 minus $37,000 minus $80,000).

So, in the above example, filing a Section 83(b) election would have saved you $16,830.