83(b) Elections No Longer Required to be Submitted with Income Tax Returns
On July 26, 2016, the Internal Revenue Service (IRS) issued final regulations (2016 Regulations) under Internal Revenue Code Section 83(b) that eliminate the requirement for an employee, a non-employee director or other service provider (collectively, the “Taxpayer” in this Alert) to submit a copy of his or her 83(b) election with the Taxpayer’s income tax return.
This change applies to restricted property transferred on or after January 1, 2016. For transfers of property during 2015, Taxpayers may rely on the guidance in the Section 83(b) proposed regulations issued on July 15, 2015 (which is identical to the guidance in the 2016 Regulations).
Compensation in the Form of Restricted Property
Restricted property transferred as compensation to a Taxpayer, such as restricted stock, is not taxable until the property is no longer subject to a substantial risk of forfeiture or until the property is freely transferable, whichever occurs earlier (i.e., the restricted property is not taxable until it “vests”).
However, under Section 83(b), a Taxpayer may elect to be taxed on the value of restricted property the year the property is transferred to him or her, instead of being taxed on the property the year in which vesting is expected to occur. If an 83(b) election is timely made, the fair market value of the property at the time the property is transferred to the Taxpayer, minus the amount paid for the property (if any), is includible in the Taxpayer’s income.
83(b) Election Requirements
An 83(b) election must be made in writing and include the following information: (i) the Taxpayer’s name, address and Social Security Number, (ii) a description of the restricted property, (iii) the date or dates the property was transferred and the tax year for which the 83(b) election was made, (iv) the nature of the restrictions applicable to the property, (v) the fair market value of the restricted property at the time of transfer, and (vi) the amount the Taxpayer paid for the restricted property, if any.
Once made, the Taxpayer’s 83(b) election is required to be provided to:
The entity for whom the services are performed (i.e., the employee’s employer);
The IRS not later than 30 days following the date the restricted property is transferred to the Taxpayer; and
The IRS by attaching a copy of the 83(b) election to the Taxpayer’s income tax return for the year of the transfer.
Change to the IRS Copy Requirements
Effective for restricted property transferred on or after January 1, 2016, the 2016 Regulations eliminate the requirement to submit a copy of the 83(b) election to the IRS with the Taxpayer’s income tax return. Notably, the 2016 Regulations do not eliminate the requirement to file an 83(b) election with the IRS within 30 days after the date on which the property is transferred to the Taxpayer.
Action Item for Plan Sponsors
To the extent any equity plan, incentive plan or compensation communications state that employees, non-employee directors or other service providers are required to submit a copy of their 83(b) elections with their income tax returns, plan sponsors should update those communication materials accordingly.