For the first time, the IRS has released an official form for taxpayers to make an election under IRC Section 83(b). The new IRS Form 15620, posted on the IRS website on November 7, 2024, replaces the model letter set out in Rev. Proc. 2012-29 that taxpayers have used until now to make an 83(b) election.
It is not clear whether taxpayers must use the new form to make an 83(b) election or if the IRS will continue to accept the prior method of making the election by submitting a letter to the IRS. Since the IRS has not yet authorized electronic filing of Form 15620, taxpayers who use the new form would mail it to the IRS, consistent with existing procedures for filing a written statement to make an 83(b) election. However, based on the IRS’s recent expansion of electronic filing requirements, 83(b) elections may eventually have to be made electronically using the new form.
Background
When property is transferred to a taxpayer in connection with the performance of services, Section 83(a) generally requires inclusion of the excess of the fair market value (FMV) of the property over the amount paid for the property in the year in which the taxpayer’s rights in the property are transferable or are not subject to a substantial risk of forfeiture.
A substantial risk of forfeiture exists if the taxpayer’s enjoyment of the property is conditioned on the future performance of substantial services or the occurrence of a condition that provides a substantial possibility of forfeiture. Property often increases in value between the initial transfer date and the date when there is no longer a substantial risk of forfeiture, resulting in increased taxable ordinary income.
Deferred compensation, phantom stock plans, restricted stock units (RSUs), stock appreciation rights (SARs), and most stock options (other than readily tradeable stock options) are not eligible for 83(b) elections because they do not satisfy the definition of “property.”
BDO Insights
The Form 15620 instructions indicate that the “person” who performs the services (e.g., an employee or independent contractor) may file the form. “Person” and “independent contractor” are broad terms encompassing U.S. and foreign individuals, corporations, partnerships, LLCs, etc.
What is an 83(b) Election?
As an alternative to delaying taxation until there is no longer a substantial risk of forfeiture, Section 83(b) allows the person who receives unvested property in connection with performing services to accelerate the taxable event to the tax year of the transfer.
Considerations
- 83(b) elections are generally irrevocable.
- Taxpayers should think strategically about the timing of income tax recognition. Once the election is made, subsequent gain on the sale of the property, if any, would be taxed at capital gain rates instead of ordinary income rates.
- There is no recoupment of taxes paid on an 83(b) election if the value of the property declines in the future or if the property is forfeited (i.e., never becomes vested). Any loss when the property is sold or forfeited would be taxed as a capital loss.
- Many taxpayers (including start-up founders) make “protective” 83(b) elections when property has little or no value.
Time is of the Essence with 83(b) Elections
Eligible taxpayers can only make an 83(b) election within 30 calendar days after a transfer of property in connection with the performance of services. Failure to file within that period makes the election invalid. An election is considered timely filed if it is sent by certified mail on or before the 30-day deadline. The taxpayer should keep proof of timely mailing.
If the last day of the 30-day period falls on a Saturday, Sunday, or legal holiday the deadline is the next day that is not a Saturday, Sunday, or legal holiday.
The transfer date of a restricted stock award is usually the date the grant is approved by the service recipient, even if the service provider does not receive the paperwork until later.
To make an 83(b) election, the service provider must file a written statement, which now includes Form 15620, with the IRS office where the taxpayer files its federal income tax return.
The taxpayer must also provide a copy of the 83(b) election to the service recipient, so the service recipient can accelerate the timing of its deduction, due to the service provider’s early inclusion of taxable income.
Taxpayers should keep a copy of any Section 83(b) election until the statute of limitations expires (generally, three years from the due date of the return that includes the election). It is often impossible to obtain a copy of an 83(b) election from the IRS.
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