On November 7, 2024, for the first time, the Internal Revenue Service (IRS) has made available a form on which elections under Section 83(b) of the Internal Revenue Code may be made. This new Form 15620 provides a standardized method for elections and should streamline the process of making an 83(b) election. However, the new form is not required to be used, and taxpayers may continue to use their own form of election, provided it contains the information required by Treas. Regulation Section 1.83-2(e).
What is a Section 83(b) Election?
A Section 83(b) election allows taxpayers to include in their gross income the fair market value of property received in connection with the performance of services at the time of receipt, rather than when the property vests.
83(b) elections are commonly made on the grant or purchase of restricted stock in early stage companies, including on the “early exercise” of options prior to vesting, where the stock value is low at the time of the election and there is an expectation that the value of the stock may appreciate over time. 83(b) elections are also typically made on the grant of LLC ownership interests. Making an 83(b) election closes the ordinary income tax event on the stock or other property, such that any future appreciation in the value will be taxed as capital gain at the time of sale, with the added bonus that the one-year holding period for long-term capital gains begins immediately upon the grant/receipt of the stock or other property.
Of course, making an 83(b) election is not without risk, and if the stock or other property does not increase in value or is forfeited prior to vesting, there is no ability to recover the tax previously paid and no loss is allowed for the amount previously included in income as compensation.
Use of Form 15620
Historically, taxpayers have had to draft their own 83(b) election forms, in accordance with applicable regulations and IRS guidance. With its standardized format, new Form 15620 streamlines and simplifies the election process and reduces the risk of taxpayer errors and omissions.
The IRS has released the form as part of a broader initiative to allow for electronic filing of the 83(b) election. But for now, Form 15620 must be filed the old-fashioned way, via mail to the IRS office where the taxpayer files his or her federal income tax return. The 83(b) election must be filed with the IRS within 30 days of the property transfer. As noted in the instructions to the new Form 15620, if the 30th day is a Saturday, Sunday or legal holiday, the election must be postmarked by the next following business day in order to be considered timely. This is hard deadline – late filings are not accepted.
A copy of the filed form must also be provided to the taxpayer’s employer and, if different, the transferee of the property (e.g., the issuer of the stock).
Takeaways
The introduction of Form 15620 marks a significant improvement in the process of making a Section 83(b) election, offering greater clarity and ease for taxpayers. These benefits will be further enhanced once electronic filing of Form 15620 becomes available. However, in view of current regulations, use of the IRS form is optional, and taxpayers wishing to provide additional context for their elections or include a spousal signature (in community property states) may find value in continuing to use their own form of election.
