Law
Offices of Ronald D. Jackson
Reaching Dreams™
About the Author
Ronald D. Jackson is an
attorney
licensed in Oregon and Pennsylvania (USA). He holds both a Law
and
Masters degree in city planning from the University of Pennsylvania.
His Portland-based practice emphasizes business law, intellectual
property, and real estate law.
Contact Info
Postal address
1001 S.W. Fifth Avenue, #1106, Portland, Oregon 97204 (USA)
Telephone
503-608-7657
Skype™ call
Contact Form
Related Resources
The Internal Revenue Service: the place to go for definitive information about federal taxes.
The Oregon Society of Certified Public Accountants provides referrals to CPAs in Oregon. You can also obtain information about accounting services from The Oregon Association of Independent Accountants.
Business Law
How to Save Money When You Receive Restricted Stock.
The Value of a Section 83b Election
Section 83b refers to a provision in the U.S. tax code. It is a provision that you may elect to use when you receive restricted stock. Restricted stock carries a substantial risk of forfeiture. For instance, the stock award might say that you will forfeit the stock if you fail to meet certain future performance goals.
To understand how a section 83b election works, you must first understand how the receipt of restricted stock is treated under U.S. tax law. The basic tax rule is that you don't report income immediately when you receive an award of restricted stock. Instead, you report income when the stock vests (i.e., when the restrictions lapse). The income you report includes any increase in the value of the stock during the vesting period. This income is taxed as ordinary income, not capital gain. For example, assume Mary's company awards her 10,000 shares of restricted stock when the shares are worth $1.00. Mary's shares vest three years later at which time the shares are worth $5.00. Mary would report nothing when she receives the restricted shares, however, she must report $50,000 when her shares vest. Her substantial gain is compensation income, subject to ordinary income tax rates. Note that Mary is taxed when her shares vest whether or not she sells them at that time!
Here's how an 83b election might have helped Mary. Because she receives restricted stock, she can make a section 83b election. Under section 83b, she voluntarily pays tax when she receives the stock, but not when it vests. Thus, Mary reports $10,000 of compensation income when she receives the stock, but nothing when it vests. That's a far cry from the $50,000 in ordinary income that she must report if she fails to make a section 83b election. Furthermore, having made a section 83b election, Mary becomes eligible for capital gains tax treatment when she sells her stock. If she sells her stock for $50,000, she reports $40,000 as a long-term capital gain, thus saving her a great deal of money.
There is no guarantee that an 83b election will save you money. It is analogous to a bet on your company's future. The outcome depends on the situation, and is not predictable. However, you should seriously consider the advantages and disadvantages of an 83b election whenever you receive restricted stock.