Written by: Eric Gashin, CPA, MBA
If you’ve ever received stock or other property as part of your compensation, you might have heard of the Section 83(b) election. This election allows you to include income and pay the tax in the year of issuance. While it’s an essential tool for many employees, it involves drafting a detailed letter to the IRS that can be confusing and often time-consuming. To simplify things, the Internal Revenue Service (IRS) recently introduced a new optional standardized form, Form 15620.
This article will explain Section 83(b) elections, why this new form matters, and how it benefits taxpayers.
What Is a Section 83(b) Election?
A Section 83(b) election is a provision in the US tax code that allows individuals who receive property subject to forfeiture to recognize the value of the property as taxable income at the time of receipt rather than at the time the property vests. This filing must be submitted to the IRS within 30 days of the equity transfer.
This election is particularly advantageous if you expect the value of the equity to appreciate significantly over time. By recognizing the income at issuance, you are locking in the fair market value at that time for ordinary income tax purposes, potentially avoiding higher taxes in the future as the equity increases in value.
In addition, the capital gains holding period begins at the time of the election, allowing any subsequent appreciation to be taxed at lower capital gains rates when the equity is sold.
However, if the equity never vests or decreases in value, you may be subject to significant adverse tax consequences. As such, careful consideration and consultation with a tax advisor are critical.
How the Process Worked Before
Before the IRS created the new optional Form 15620, filing an 83(b) election required writing a custom letter. Taxpayers needed to include specific information about the stock, its value, and the tax year issued. This process was daunting for taxpayers who were unfamiliar with the technical requirements, often resulting in mistakes such as missing details, unclear descriptions, or filing errors that caused the election to be denied.
Submitting the election also required mailing a hard copy of the election to the IRS, giving a copy to your employer, and sometimes dealing with deadlines that left little room for error. The complexity of this process discouraged some taxpayers from making the election.
What Is Form 15620?
To simplify the process, the IRS recently introduced Form 15620, a standardized document designed explicitly for Section 83(b) elections. This form acts as a template, ensuring taxpayers provide all the required information in a clear and organized manner.
Form 15620 reduces the likelihood of errors and ensures compliance. However, taxpayers can still continue to file 83(b) elections using a customized letter.
The Importance of Form 15620 for Taxpayers and Employers
The introduction of Form 15620 is a significant improvement for several reasons. It helps taxpayers avoid leaving out critical details that could lead to their election being denied and makes the process less stressful for those unfamiliar with tax law. Additionally, it reduces the time and effort required for both taxpayers and the IRS staff who review these elections.
Employers also benefit from this streamlined approach. The standardized format makes it easier to guide employees through the process, track compliance, and avoid errors or missed deadlines.
Conclusion
The IRS’s introduction of the new optional Form 15620 for Section 83(b) elections represents a significant step forward in simplifying tax compliance. By creating a standardized form, the IRS has made it easier for taxpayers to navigate the process.
While Form 15620 simplifies the mechanics of filing, timely and strategic action is essential to maximize the election’s potential tax benefits. Taxpayers should evaluate the potential tax savings, the risks of forfeiture, and the likelihood of equity appreciation. Consulting a tax advisor is strongly recommended to ensure the election aligns with your unique long-term financial and tax goals.