OUR THOUGHTS ON:

IRS Proposed Regulations Remove Requirement to Attach a Copy of Code Sec. 83(b) Election with the Tax Return

SD Medallion Services

By Marko Zivanov

To assist taxpayers in e-filing of individual tax returns, the IRS has issued proposed regs[1] that eliminate the requirement that taxpayers must submit a copy of a Code Sec. 83(b) election[2] with their tax returns for the year in which the property subject to the election was transferred.

What is an 83(b) election?  When an employee is given an equity in a company as compensation, this is often subject to a vesting agreement. This means that the employee will pay taxes on compensation income based on the fair market value of the stock at the time of vesting. However, under the tax code Section 83(b), a taxpayer/employee can accelerate the vesting by making the 83(b) election. This election allows an employee to include the value of stock in income when it was initially granted rather than when it vests. It makes sense to take the 83(b) election and pay the income tax upfront when the employee receives the stock of a new startup company with a little value. If the company stock goes up in value, the employee will not recognize the income when the stock vests.

Regulations provide that the 83(b) election is made by filing one copy of a written statement with the IRS office with which the taxpayer files his return. In addition, one copy of such statement must be submitted with the income tax return for the year of transfer.

In recent years, the IRS has become aware that many taxpayers who wish to electronically file their income tax returns have been unable to do so because of the requirement that they submit a copy of their Code Sec. 83(b) election with their income tax return. The IRS recognizes that, very often, the commercial software for filing income tax returns electronically is not capable for submitting the 83(b) election to the IRS with the e-filed return. The IRS noted that this created an obstacle for e-filing of a return.

The proposed regulations would no longer require a copy the 83(b) election with the return for the year in which the property subject to the election was transferred. These regulations under Section 83 are proposed to apply as of January 1, 2016, and would apply to property transferred on or after that date. Taxpayers may rely on these proposed regulations for property transferred on or after January 1, 2015.

Contact us if you have questions or concerns regarding your tax returns and visit our SD Medallion Services webpage to learn about the services that we can offer individuals.

[1]REG-135524-14.
[2]Internal Revenue Code, Section 83(b)

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