Moneyzine
Contents
/Investment Guides /Section 83(b) Elections

Section 83(b) Elections

Moneyzine Editor
Author: 
Moneyzine Editor
4 mins
September 21st, 2023
Advertiser Disclosure

Definition

The term Section 83(b) elections refers to the Internal Revenue Code that allows individuals to immediately declare the excess of fair market value of property transferred to them as gross income in the current year. Section 83(b) elections are of particular importance to individuals receiving shares of restricted stock options.

Such an election can be made if the property transferred is not subject to substantial risk of forfeiture, and applies to the non-vested portion of such transfers.

Explanation

Stock grants and awards typically provide a select group of employees with an immediate share of company ownership through the transfer of common stock they can purchase at a discount or receive free of charge. Generally, these plans fall into two categories: unrestricted and restricted shares. Unlike restricted programs, unrestricted grants and awards will involve a vesting schedule, whereby the employee is entitled to retain ownership of the shares of stock over time or when certain performance standards are achieved.

When grants of stock are subject to restriction, the tax law allows the employee to declare the bargain element of the award as income as the shares become vested. In doing so, restricted grants of stock act like a deferred compensation plan, and allow the employee to spread the income tax burden over time.

A Section 83(b) election allows the employee to lock in this compensation when the employee's rights to the property are transferable, or when there is no longer a substantial risk of forfeiture, whichever is earlier.

While the vesting schedules associated with restricted shares appear to be advantageous to the employee, if the market price of the company's common stock rises rapidly, the bargain element may be considerably higher than when first granted. The tax law allows employees to lock in this compensation through the use of a Section 83(b) election.

An election under Section 83(b) is subject to several restrictions. For example, the transferred property must have an ascertainable fair market value. The required paperwork must also be filed with the IRS no later than 30 days after the transfer of the property to the employee. The company granting the stock should also receive a copy of the paperwork filed with the IRS, and the document should be attached to the current year's federal income tax return. An example document can be found here: Sample 83(b) Letter.

Making a Section 83(b) election will place a larger income tax burden on the employee in the near term. However, if the employee believes the market value of the transferred stock will rise substantially before the shares vest, the overall tax burden may be smaller.

Example

Company A has awarded its CEO 1,500 shares of restricted stock. As long as the CEO remains with the company, she will receive the 1,500 shares of Company A's common stock free of charge. While the current market price of Company A's common stock is $30.00 per share, the CEO believes the stock will be valued at $60.00 per share three years from now. The taxable portion of these restricted shares would be calculated as:

End of Year 1 (500 shares at $40 per share)$20,000
End of Year 2 (500 shares at $50 per share)$25,000
End of Year 3 (500 shares at $60 per share)$30,000
Total Compensation$75,000

In order to lower her overall tax burden, Company A's CEO has decided to file a Section 83(b) election. In doing so, her total taxable compensation would be:

= 1,500 shares x $30.00, or $45,000

By making this election, the CEO will have $75,000 - $45,000, or $30,000 less in taxable income if Company A's stock increases to $60.00 per share.

Related Terms

common stock, stock warrants, employee stock purchase plans, stock compensation plans, stock option plans, stock grants, common stock equivalent, contingent issuance agreement, appreciation and phantom rights, stock rights

Explore Investing Further

Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
Looking for a way to avoid swap fees while trading forex?
Below listed are the small reviews of the top 10 ETF brokers available across the United States.
Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
The table below lists the best stock picks under $2, listed on public exchanges.
The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
This section will highlight the best EV-trading penny stocks available in the United States.
The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.

Related Content

Biden Or Trump: Who Is Better For The Economy And Stocks?
Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
March 19th, 2024
When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
March 14th, 2024
DRIP Brokers: Best Brokers for Dividend Investing for March 2024
Reinvesting dividends could mean compound growth for your portfolio. But reinvesting them manually can be a hassle. This is why you could benefit from a dividend reinvestment plan (DRIP).
March 12th, 2024
How To Invest in Real Estate Without Becoming a Landlord
We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
March 6th, 2024
Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
February 29th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.