On July 25, 2016, the IRS finalized regulations under Section 83 of the tax code that removes a procedural step in the process of filing an 83(b) election.
As a reminder, Section 83 of the tax code provides that when property (i.e., restricted stock) is transferred to a service provider in connection with the performance of services, the excess of the fair market value of the property over the amount paid for such property, if any, is included in gross income in the first taxable year in which the service provider’s rights in the property are no longer subject to a “substantial risk of forfeiture” (i.e., the property is vested).
An 83(b) election, however, allows the service provider to elect, within 30 days of the transfer date, to include in income at the time of transfer (rather than at vesting) the excess of the fair market value of the property over the amount paid for such property, if any. The 83(b) election is extremely beneficial to service providers who receive grants at a time when the value of the property is low (i.e., grants of startup company stock).
Due to the significant potential tax benefits involved in making the 83(b) election, the IRS has very stringent procedural rules. Under these rules, the service provider was required to submit a copy of the election with his/her income tax returns in the year in which the property is transferred. However, commercial e-filing software often did not include mechanisms for submitting 83(b) elections and thus service providers were unable to file electronically. In an effort to continue to push taxpayers to e-file, the IRS removed this obstacle and eliminated the requirement that a copy of the 83(b) election be submitted with a service provider’s tax return. Taxpayers may rely on the regulations for property transferred on or after January 1, 2016.