The Internal Revenue Service (IRS) has recently released a new form, 15620, which will significantly impact the way taxpayers report certain transactions in relation to Section 83(b) elections.
What is an 83(b) Election?
An 83(b) election is a valuable tax strategy for individuals who receive property, such as restricted stock or LLC ownership interests, as compensation in exchange for services. However, the property is still subject to vesting. By making an 83(b) election, the individual can lock in the tax liability at the time of transfer, which can result in significant tax savings if the property or stock increases in value over time. In addition, 83(b) elections also put a clear stake in the ground and begin the tolling period for long-term capital gain treatment.
Example of 83(b) Election tax savings
To illustrate, suppose an individual receives restricted stock valued at $500, but the rights do not vest for three years, and during that timeframe, the stock’s value increases to $2,000. By making an 83(b) election, this person can yield substantial tax savings, because not only will they pay tax on the $500 rather than the $2,000, but they will also be eligible for long-term capital gain treatment instead of having to wait an additional year from the date of vesting.
Risks of making an 83(b) Election
However, some risks are associated with making an 83(b) election. If the property or stock decreases in value, the individual will have already paid taxes on the higher value. Additionally, if the individual’s rights to the property never vest, they will not be able to recover the taxes paid.
Benefits of using Form 15620 for 83(b) Elections
The new IRS Form 15620 can now be used by taxpayers to make an 83(b) election. The form requires taxpayers to provide detailed information about the property or stock received, including the date of transfer, the total fair market value, and the amount of tax paid. The form must be filed within 30 days from the date the transfer occurs by mailing it to the IRS, and the taxpayer must also send a copy to the employer or person who granted the property or stock.
The new IRS Form 15620 is an important development for taxpayers who make 83(b) elections. By providing detailed information about the property or stock received (and its valuation at the time it is received), taxpayers can ensure they comply with IRS reporting requirements and avoid potential penalties. Understanding 83(b) elections is critical for individuals who receive property subject to vesting as compensation, and consulting with a tax professional is highly recommended before making an election under Code Section 83(b).