83(b) election to be taxed on the current value of your vested distribution.
Being a founder of a startup is exciting. Even more exciting is receiving stock or shares in the company you expect to grow and be successful. When receiving stock via a vesting agreement, the amount that vests each year will be treated as compensation, unless an 83(b) election is made.
We can help you file your 83(b) election, or correct some common errors made in those elections. Here are some common questions and remedies in filing.
What is an 83(b) election and why do I need it?
Making an 83(b) election allows you to be taxed on the current value upon signing the share issuance contracts, which can save the shareholders and company both substantial money by reducing annual earnings as the company becomes successful, and prevent the company having to get regular 409(a) valuations to set value for that compensation.
Do foreign founders need to file 83(b) elections?
The 83(b) election creates US compensation, which means that unless you live in the US, or are a US citizen, this will not create wage-type income based on the vesting of the shares. However, it is still recommended for foreign founders to file if they plan to move to the US during the vesting period, or if they live in a country that might treat this vesting of shares as income in their country of residence.
What IRS form is used to file the 83(b) election?
There is no IRS form 83(b) and instead this election is filed in a letter format. Since there is only a 30 day period to file the 83(b) election with the IRS, it is best to get professional help quickly to get this filed.
Our new company package can help you start your company right from the start - and not just with elections. You get a consultation, an entrepreneurs group membership, the elections, a cloud accounting software subscription with Xero and cap table set up.
What is the due date for filing the 83(b) election?
The primary pitfall most founders don’t realize is that they only have 30 days from signing the share issuance/vesting agreement to make that decision, they can’t wait and make this decisions at tax time. Failure to file within 30 days can have significant tax consequences. You may want to discuss the pros and cons of making an 83(b) election with us before you do so, or maybe you recently realized you made a mistake. Either way, we can help you avoid or fix these common errors, though some are easier to fix than others.
What do I do if I missed the deadline to file my 83(b) election?
This is probably the most common error, and the hardest to fix. Founders have a million things to look after, and filings are the thing most founders don’t think about until the end of their fiscal year, not when shares are received. Everyone knows you pay tax at the end of the year, right? This is the one case that does not apply and decisions have to be made promptly.
If the company has not yet earned any income or received investment then you may be able to accelerate the vesting and issue the full amount of shares while the company still has no inherent value. If a vesting arrangement really is necessary, like for multiple founders, then sometimes it is best to close the company and launch a new entity, before there is value. Every situation is unique, which is why we recommend a consultation to explore your options, which depends on the financials of the business. If it looks like business is booming, you can explore a path to take advantage of that with one of our advisors.
What if the form was filed incorrectly or was missing information?
Many small errors can be corrected by sending a letter to the IRS explaining what was incorrectly relayed. Our Resolution specialist can review your election, and work with the IRS to file an updated form with complete information and corrections, as long as there are no material changes. However, we need to review what was filed first, before advising you on a possible solution.
I didn’t realize I only had 30 days to file the 83(b) election after I got my stock agreement. What do I do now?
Depending on the value of the company now, the relationship between the founders, and your path going forward there may be solutions. Often stock issuance can be accelerated in order to make it fully issued, and get rid of the increased compensation risks. The best option may be to do nothing, but that requires a conversation based on your situation. We recommend a consultation to explore your options, as there are pros and cons to each solution. Some paths are more difficult than others.
We filed the 83(b) election but need to complete additional information. Is that possible?
Some non-material errors in 83(b) elections can be corrected, but others cannot. Our Resolution specialist can review your election and work with the IRS to help you file an updated form with more complete information and make basic corrections. Or we can advise you on how else best to move forward.
What if we made a mistake on the 83(b) election form?
It is important to act quickly to take steps to correct this as soon as possible to minimize tax consequences and avoid confusion with the IRS. First, contact us at email@example.com so that we may review your form. We may need a consultation to discuss the scope and the impact of the error and advise you on the best course of action.
If the mistake or omission does not affect the substance of the election, we may be able to correct the error by amending the form. We can submit a corrected copy of the form to the IRS, along with a letter explaining the correction, and possibly follow up with a phone call with our Resolution Service.
I filed the 83(b) Election but I changed my mind? Can I cancel it?
Once made, 83(b) elections are irrevocable. For most startups, this is not a problem because they still have zero value in the company at the time of making the 83(b) election, and therefore the election doesn’t have a tax consequence. Unfortunately though, if this election is made when there is a taxable amount to pay, there is no way to revoke this, and even if the stock does not vest, the tax is still due on that amount.
Though revoking the election is not possible, you often can reduce tax in other ways, such as by offsetting this tax with other losses from that business investment
How do I make sure 83(b) is filed correctly?
At Cleer we are here to help founders from the start. Our 83(b) filing service can be purchased separately for each founder. Or our new company package includes a consultation, an entrepreneurs group membership, the elections, a cloud accounting software subscription with Xero, and cap table set up. Companies have a 79% success rate in their first year, but with a Xero subscription to track your finances, that success rate jumps to 93%! to learn more, email firstname.lastname@example.org.
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