For years, one of the most nerve-wracking moments for company founders and early employees has received a crucial, modern upgrade. The Internal Revenue Service (IRS) has finally entered the digital age for a key tax filing, reducing risk and simplifying a critical process.
If you’ve ever been granted restricted stock or profits interests in your company, you’re likely familiar with the 83(b) election. It’s a powerful tax strategy that allows you to be taxed on the fair market value of your equity at the time of grant—often when that value is minimal, or even zero—rather than later when the shares vest and their value has skyrocketed.
However, the rules for proper 83(b) election filings have been notoriously analog and unforgiving, until recently.
The Old Way: A Race Against the Clock
Traditionally, filing an 83(b) election was a physical, logistical challenge. A stock recipient had 30 days from the date of receiving their equity to make the election. They had to print, sign and mail the election statement to the IRS, along with a cover letter. They also needed to send a copy to the company granting them the equity and keep proof of mailing in their own records.
Stakes were high. A lost letter, a postal delay, an administrative error. or a forgetful recipient could mean missing the 30-day deadline irrevocably. The consequence was a potential tax bill on the appreciated value of a recipient’s equity at each vesting period— – a potentially massive financial hit, on top of a hefty administrative burden. Companies and their attorneys would spend valuable time and energy reminding stock recipients of the obligation, or even handling it on their employees’ behalf, raising ethical questions about who is and should be responsible for an individual employee’s tax decisions.
The New, Streamlined Process
At long last, the IRS is bringing the 83(b) election filing process into the 21st century. Stock recipients can now file their 83(b) elections electronically. The IRS has added an electronic filing option for Form 15620 to its online platform for filing information returns. While the system isn’t new, the ability to file an 83(b) election on it is.
Here’s what this means for startups and their stock recipients, who are usually founders or early stage employees, advisors or consultants:
- Instant Proof of Filing: The moment a recipient submits their election online, they receive a digital timestamp and confirmation. The anxiety of wondering whether the election arrived in the mail is eliminated.
- Reduced Risk of Error: The digital form helps ensure all required information is included, reducing the chance of rejection for incomplete filings.
- Efficiency and Speed: The process is significantly faster, taking minutes instead of requiring a trip to the post office. This is crucial when working against a strict 30-day deadline. A recipient is much more likely to make the filing themselves—if desired—relieving the company from having to determine whether to step in and make the filing on the individual’s behalf.
What Hasn’t Changed: The Substance
It is critical to understand that the rules of the 83(b) election have not changed. The 30-day deadline is still in effect. The requirement to provide a copy to the company remains, but it will now be easier to deliver (recipients can email directly as opposed to scanning a physical copy). The need for a careful valuation of the equity at time of grant is as important as ever. Finally, the election itself remains a strategic decision with significant potential tax implications.
Takeaways and Action Items for Companies and Founders
The IRS has reduced a major administrative burden with this update, freeing up companies and founders to focus on innovation and growth. Take these steps now to implement the change:
- Update Your Equity Documentation: Ensure your grant agreements and equity plan FAQs reference the option to file electronically.
- Inform Your Teams: Make your employees and founders aware that this safer, more reliable filing method is available.
- Consult with Counsel: Whether or not to make an election remains a complex decision, and stock recipients should be advised to consult with tax and legal advisors to determine if it’s the right strategic move for them individually. For additional information, contact me or one of our tax attorneys.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
