The Internal Revenue Service recently issued Revenue Procedure 2012-29, which contains sample language that may be used (but is not required to be used) for making an election under Section 83(b) of the Internal Revenue Code.
Section 83 of the Internal Revenue Code performs several important functions in determining the income tax consequences to both the service provider (generally, the employee) and the service recipient (generally, the employer) with respect to transfers of restricted property in connection with the performance of services.
Generally, if property is transferred in connection with the performance of services, the excess of the fair market value of the property as of the first time that the transferee’s rights in the property are not subject to a substantial risk of forfeiture, over the amount (if any) paid for the property is included in the service provider’s gross income for the taxable year, which includes such time, and is deductible by the service recipient.
However, Section 83(b) permits the service provider to elect to include in gross income the excess (if any) of the fair market value of the property at the time of the transfer over the amount (if any) paid for the property, as compensation for services.If a Section 83(b) election is made, any subsequent appreciation of the property in the hands of the service provider is not taxable as compensation to the person who performed the services.
In computing the gain or loss from a subsequent sale (after the restrictions lapse) of property for which a Section 83(b) election was filed, the basis of such property is the amount paid for the property(if any) plus the amount included in gross income at the time of the transfer.The gain or loss is capital gain or loss.
However, it is important to note that a Section 83(b) election carries certain risks to the service provider. If property for which an election was made under Section 83(b) decreases in value or is forfeited before vesting, no ordinary tax deduction will be allowed for the amount previously included in gross income. A forfeiture will be treated as a sale or exchange upon which there is recognized a loss equal to the excess (if any) of 1) the amount (if any) paid for the property, minus 2) the amount realized (if any) upon forfeiture. Any such loss will be treated as a capital loss. In a forfeiture situation, the service provider does not get basis for the amount previously included in income under the Section 83(b) election.
In addition to several examples of the foregoing rules, Revenue Procedure 2012-29 also includes sample language for making the election under Section 83(b), which is included below.
It is important to note that three copies of the Section 83(b) election must be completed. The first copy must be completed and filed with the Internal Revenue Service office with which the taxpayer files his or her tax return within 30 days of the date of transfer of the property. A second copy must be provided to the person for whom the services were performed, and a third copy must be included with the annual income tax return of the service provider for the year in which the services were provided.
Sample Section 83(b) Election under Rev. Proc. 2012-29
The undersigned taxpayer hereby elects, pursuant to § 83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income as compensation for services the excess (if any) of the fair market value of the shares described below over the amount paid for those shares.
1. The name, taxpayer identification number, address of the undersigned, and the taxable year for which this election is being made are:
TAXPAYER'S SOCIAL SECURITY NUMBER:
TAXABLE YEAR: Calendar Year 20___
2. The property which is the subject of this election is shares of common stock of ____.
3. The property was transferred to the undersigned on [DATE].
4. The property is subject to the following restrictions: [Describe applicable restrictions here.]
5. The fair market value of the property at the time of transfer (determined without regard to any restriction other than a nonlapse restriction as defined in §1.83-3(h) of the Income Tax Regulations) is: $ per share × shares = $ .
6. For the property transferred, the undersigned paid $ per share × shares = $ .
7. The amount to include in gross income is $ . [The result of the amount reported in Item 5 minus the amount reported in Item 6.]
The undersigned taxpayer will file this election with the Internal Revenue Service office with which taxpayer files his or her annual income tax return not later than 30 days after the date of transfer of the property. A copy of the election also will be furnished to the person for whom the services were performed. Additionally, the undersigned will include a copy of the election with his or her income tax return for the taxable year in which the property is transferred. The undersigned is the person performing the services in connection with which the property was transferred.
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