You have already incorporated your business as an entity and granted stocks subject to vesting (‘restricted stocks’), meaning that you will gradually acquire your corporation’s overall equity. Along with the incorporation phase, the post-incorporation phase will ensure some critical issues including tax efficiency. By prior taxation of the restricted stocks, filing a Section 83(b) election will be beneficial in the case of an increased valuation over time.
Assuming you own a portion of restricted stocks, included in the founders’ pool of the corporation’s ownership structure. And let’s say you will be vested in 5 years. To fulfill your income tax obligations, you must pay the corresponding taxes whether in the year the stock has issued or transferred. Considering the raised value of your stocks over time, you will probably be subject to higher taxes, both with the taxable value and the actual tax rate, arising from the graded income tax rate structure.
Such a rate may raise up to 37% at the time of the actual transfer date of stocks, and thereby might cut your overall turnover. Filing a Section 83(b) election, however, will be deemed as a declaration of the election on prior taxation, regarding the restricted stocks that you have.
By the election, you will be able to pay your income tax regarding the restricted stocks at the time of prior granting of the restricted shares. Keeping the gap high between the price on initial taxable value and the taxable value at the time on a sale/exit phase will offer you to benefit more of the long-term capital gains tax rate, a percentage of 20.
With the higher taxable value on long-term capital gains tax, you will pay your taxes related to the price gap between the sales and the acquisition date, with the rate of 20%, rather than the maximum income tax rate of 37%. The post-incorporation process grants some financial solutions efficiently while operating your business.
Including the filing of Section 83(b) election, many of the post-incorporation opportunities can be achieved by specific IRS forms. Yet, there are also absolute deadlines regarding such processes, including the filing of a Section 83(b) election within 30 days following the initial grant of restricted stocks. Including the filing a Section 83(b) election, Clemta offers a complete consultancy in terms of your incorporation and post-incorporation procedures.
You may check our website and the add required services to your cart by one-click, as your first step of the incorporation phase. Clemta will handle the rest for you.