Section 83(b) elections – simple!
Section 83(b) elections get simplified (a little)
Last year, the IRS proposed changes to the section 83(b) regulations that affect almost all startups and their founders. The IRS adopted the proposed changes without modification, which remove the requirement that founders who receive stock in connection with their performance of services file a copy of their 83(b) election with their personal income tax return for the transfer year.
The regulation drafters explain that this change is designed to facilitate e-filing for personal tax returns, which generally did not allow individuals to include the 83(b) election copy. The new regulations are effective for transfers occurring on or after January 1, 2016.
To date, founders have suffered much uncertainty related to the requirement of filing a copy of their 83(b) election with their return, including:
- whether a failure to file the copy nullifies an otherwise valid election;
- whether to file two copies with different IRS centers when a taxpayer relocates mid-year; and
- whether to file additional copies when a return is amended.
With respect to the first issue, IRS rulings have stated that a valid and timely election is not disturbed by a taxpayer’s failure to file the subsequent copy. (Of course, a careful stockholder with much at stake is often not comfortable relying on IRS rulings issued to other parties.) Thankfully, taxpayers need not lose anymore sleep over these issues related to the election copy.
While this guidance is helpful, Section 83 and the 83(b) election retain many landmines, including:
- the 30-day deadline to file an election;
- the requirement to elect in cases where the shareholder pays full fair market value for the restricted property; and
- election mechanics for non-US shareholders.