Section 83(B) Elections

Posted on April 11, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Considerations for Hospital Employees

Staff Writers 

Internal Revenue Code § 83(b) allows a hospital or other employee who receives employer stock on a tax-deferred basis to be taxed immediately in the year the stock is transferred, regardless of the presence of a substantial risk of forfeiture.

If the employee makes such an election, any subsequent appreciation is not taxable as compensation. Once made, the IRS must approve any change you may want to make.

Indications

There are several reasons why a taxpayer might want to make such an election.

  • First, absent a Section 83(b) election, any appreciation in the value of the stock that occurs after transfer will then be subject to ordinary income taxation at the time of vesting for the full amount by which the then-appreciated fair market value exceeds the amount paid, if any.
  • If a Section 83(b) election is made, any post-transfer appreciation will not be taxed until the stock is sold and will only be subject to capital gain taxation on its ultimate sale.
  • If one expects the restricted property to appreciate substantially before vesting and one plans to hold the property for a long time after it vests, such delay in taxation of the appreciated amount may be a significant benefit.
  • If the taxpayer holds the property until death, any post-transfer appreciation will escape income taxation entirely.

Contra-Indications

  • The main disadvantage of the Section 83(b) election is the triggering of current taxation for the excess of fair market value (without regard to any restrictions or risk of forfeiture) over the amount paid.
  • In addition, the Code provides that, if a Section 83(b) election is made before the lapse of the restrictions and such property is subsequently forfeited due to the failure to meet the conditions, no deduction can be made.
  • Furthermore, if a Section 83(b) election is made and the property later declines in value; only a capital loss is allowed.
  • Finally, the employer receives no deduction for any later appreciation before vesting, nor will the hospital or company be able to take a deduction in the case of transferred stock on any dividends after the transfer that are paid to the employee.

Assessment

The election consists of a written statement, mailed to IRS center where you file your return, within 30 days of the triggering transaction.  It must include everything about the transaction.

Conclusion

Your comments, experiences and opinions on this election are appreciated.

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