Article: What is an 83(b) Election and what is IRC Section 409A?
Category: 1040 Income Tax, 1099K
An 83(b) election is a provision in the United States tax code that allows an employee or service provider to be taxed on the fair market value of restricted stock or other equity awards at the time of grant, rather than when the restrictions on the stock lapse. This can potentially result in significant tax savings if the value of the stock increase over time.
Where do the savings originate? Without the 83(b) election the holder of the stock or awards must pay ordinary income tax on the proceeds in the future at time of sale. With the 83(b) election, the holder pays long-term capital gains taxon the proceeds.
To make an 83(b) election, you typically need to submit the election form to the Internal Revenue Service (IRS) within 30 days of receiving the restricted stock or equity award. In order to determine the fair market value of the stock at the time of grant, an 83(b) valuation is often required.
An 83(b) valuation is performed by a qualified independent appraiser or valuation expert and is used to determine the fair market value of the restricted stock or equity award on the date it was granted. The valuation report provides documentation to support the election and should include a detailed analysis of the factors considered in determining the value.
It’s important to consult with a tax advisor or attorney who is familiar with the rules and regulations surrounding 83(b) elections to determine if an 83(b) valuation is necessary in your specific situation. Factors such as the type of equity award, the vesting schedule, and the potential appreciation of the stock should be taken into account when making this decision.
Section 409A refers to a specific provision in the United States Internal Revenue Code that governs the taxation of nonqualified deferred compensation plans. The purpose of Section 409A is to regulate the timing and conditions under which deferred compensation can be paid to employees, independent contractors, and other service providers in order to prevent abusive tax avoidance practices
Under Section 409A, deferred compensation generally includes any compensation that an individual earns in one year but that is paid in a later year. Examples of deferred compensation can include stock options, restricted stock units, phantom equity, deferred bonus plans, and certain types of retirement plans.
The key aspect of Section 409A is that it requires deferred compensation to meet specific requirements regarding the timing of payment, restrictions on acceleration, and certain other rules. If these requirements are not met, the deferred compensation can be subject to immediate taxation and additional penalties.
To comply with Section 409A, companies often obtain a 409A valuation. A 409A valuation is an independent appraisal or valuation of the fair market value of a company’s stock or other equity interests. This valuation is used to determine the strike price for stock options and to ensure that the exercise price is not set below the fair market value. It is also used to set the value of other types of deferred compensation
It is important for companies to adhere to the rules and regulations of Section 409A to avoid potential tax consequences for employees or service providers. Failure to comply with Section 409A can result in immediate taxation of deferred compensation, additional taxes, interest, and penalties. Therefore, it’s advisable to consult with a qualified tax advisor or attorney who is familiar with the requirements of Section 409A when implementing deferred compensation plans or issuing equity-based compensation.