Welcome back to Founders University, our core curriculum designed to provide startup founders with the basics needed to launch a company while minimizing costly missteps or mistakes.
For our next session of Founders University, we examine the concept of restricted stock taxation. In this course, partner Lynda Galligan discusses restricted stock and explains the differences between elections under sections 83 (a) and 83 (b) of the tax code.
Ready. Set. Learn!
Restricted Stock Taxation
Restricted stock is subject to taxation under section 83 of the tax code.
Section 83 (a) of the tax code says that when stock is subject to vesting, it’s not taxable until it vests or becomes transferrable.
Section 83 (b) of the tax code, however, allows taxpayers to make an election with the IRS to change how their restricted stock is taxed.
An 83 (b) election tells the IRS to tax the shares right away – at issuance, rather than at vesting. An 83 (b) election causes income tax to be due on the spread.
If the recipient pays fair market value for the shares, however, then there should be no spread. The theory is that the value is much lower at issuance, so there should be little or no income tax due. Any further appreciation is taxable at capital gains rates.
It’s important to remember: an 83 (b) election is a one-time opportunity. It must be filed with the IRS no later than 30 days after the shares are issued.
There’s no cure if that 30-day deadline is missed.
Did you miss a Founders University session? You don’t have to go to summer school – just catch past sessions here.
Be sure to subscribe to the FWB blog to receive the latest class lessons from Founders University and more!