When you are creating a startup, there are lots of things to consider. Often, optimizing your tax obligations can slip through the cracks. But this could be a costly mistake. A prime example of this is a form 83 (b). Taking a few minutes to fill out this form and file it with the IRS could end up saving you thousands of dollars at tax time. Let’s take a closer look at these forms and how you can use them to your advantage.
How A Form 83 (b) Election Works
Form 83 (b) might sound unassuming, but it can lead to big benefits in the long term. This will allow you to pay taxes at the time that you are granted restricted shares, based on the fair market value. If you don’t file in time, you will need to pay during the vesting period. Basically, you are paying taxes on your shares upfront.
Benefits Of A Form 83 (b)
Using a form 83(b) could make a big difference, for three reasons. First, if your company does well, the shares might have increased in value. However, you’ve already paid taxes at the lower levels. As a result, you’ll need to pay less capital gains tax when you decide to sell. Less money going to the IRS means more cash staying in your pocket.
Secondly, it will be easier to claim long-term capital gains. These are taxed at a more favorable rate than short-term gains. However, there is a catch. You need to wait for a year before you sell the asset. Normally, this clock starts when the shares vest. However, a form 83 (b) lets you start the clock when you are granted the stock. This gives you more flexibility, as you can sell your stocks earlier.
Lastly, there is a chance that the stock will fall in value before the vesting. Normally, this is bad news. But if you took out a form 83 (b) you might be able to deduct your losses. This helps protect you from stock volatility.
Risks Of A Form 83 (b)
These forms only work if the vesting goes according to plan. The company might go bankrupt. Or you might leave the organization before the vesting period. In these scenarios, your stocks would become worthless. However, the IRS won’t let you claim back the taxes you paid through a form 83 (b). This could leave you thousands of dollars out of pocket.
Because of this, it’s a good idea to talk to your accountant. They will be able to review your unique situation and advise whether or not a form 83 (b) is a good idea for you.
Filing A Form 83 (b) Election
Now that you know how a form 83 (b) works, we can look at how you can use it to your benefit. The good news is that this is a fairly simple process. First, you must print out three copies of form 83 (b). Fill out each one. But where to mail 83 (b) election? There are a few places to send them.
First, you’ll need to send one to the IRS. Make sure that you’ve also filled out the copy letter and attached it to your form. Send this to the IRS center where you would ordinarily file your tax returns. Before you send it off, it’s always a good idea to double-check that you have the right address. Make sure to use certified mail, to make sure that your document arrives safely.
The next form is to be sent to your company. They will need it for their internal records.
You might need to attach a copy of the form to your state personal income tax documents. However, this doesn’t apply in all jurisdictions. Make sure to check with your accountant to see if this step is necessary. If it is, they will tell you where to mail 83b election.
Lastly, it’s a good idea to keep a copy of your completed form 83 (b) for your personal records.
However, there is one important catch. For this to work, you need to file a form 83 (b) within 30 days of being granted the shares. The countdown begins on the day that the company approves your share grant. It can take a while for you to receive the paperwork. If you miss this deadline, you won’t be eligible. Because of this, it’s a good idea to contact your accountant as soon as the grant is approved. This should give you plenty of time to get the forms in.
Conclusion
A crucial part of being a successful entrepreneur is learning how to optimize your taxes. Simple actions, like filling out a form 83 (b) can have a big impact. This strategy can give you protection if the value of your shares falls and end up saving you thousands of dollars in capital gains tax if you sell for a profit.
