Are you considering Section 83(b) election to save tax?

Restricted stock is stock that’s granted subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk or you sell it. You then pay taxes on the stock’s fair market value at your ordinary-income rate.

12/10/18: The IRS has provided guidance on a new deferral option for certain stock-based compensation. The option was added by the Tax Cuts and Jobs Act. It allows qualified employees of privately held corporations to defer paying income tax for up to 5 years on the value of qualified stock options and restricted stock units granted to them by employers. Generally, highly compensated officers and some others can’t make the election. Taxpayers can rely on guidance provided in Notice 2018-97 until proposed regulations are issued. 

Advantages of Section 83(b)

Make a Section 83(b) election within 30 days after receiving to recognize ordinary income. This election can be beneficial if the stock is likely to appreciate significantly. Why? Because it allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.

Potential Disadvantages of Section 83(b)

  • You must prepay tax in the current year — which also could push you into a higher income tax bracket or trigger or increase the additional 0.9% Medicare tax.
  • Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or sell it at a decreased value.

If you’ve recently been awarded restricted stock or expect to be awarded such stock this year, work with us to determine whether the Section 83(b) election is appropriate for you. 

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.

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