The Tax Effects of Filing or Not Filing an 83b Form
Keep two things in mind. Number one, all shares have value. Even shares of the earliest stage company with nascent technology. Number two, almost all startup companies subject founder shares to vesting schedules.
The most common vesting schedule is four years long unless the founders file an eighty three B form, the shares will be taxable to the founder and the year that they vest. Sounds good right? No. Wrong.
If the shares are taxed as they vest, the taxes due will be significantly higher as time goes on and since the most common vesting schedule is four years long, founders of successful companies will pay far more in year four than they do at the time the company is founded.
The IRS allows recipients of restricted stock that is subject to a vesting schedule to be treated as if the shares were not subject to vesting.
By filing eighty three B forms, the founder will pay all of the taxes on all the shares in the year that the company is founded instead of as the shares vest. Filing eighty three B form also starts the capital gains holding period on the date of grant instead of the date of vesting.
For the founders of a brand new company, this is almost always a no brainer. The shares of the startup company will never be worth less than they are on day one unless something goes terribly wrong, So that is the most tax efficient time to pay the taxes due on the shares.
Here are the basic best practices for filing an eighty three B form:
One: an eighty three B form must be filled with the IRS within thirty days of the issuance of the shares there are no exceptions.
Two: stockholders should make three originals, keep one, send two to the IRS with a return envelope self-addressed and stamped and ask for a stamped and filed copy of your records.
Three: Check with the IRS website before you submit the form to confirm that you are sending the eighty three B form to the appropriate IRS office address.
Four: send the package to the IRS return-receipt requested it’s worth the extra couple of dollars to make sure you can prove it got where it is supposed to go.
Number five: if you have special circumstances, check with your counsel or tax advisor.