IRS Finalizes Regulations Eliminating Requirement to File §83(b) Election with Tax Return
On July 25, 2016, the IRS finalized regulations on procedures for making an election under Section 83(b) of the Internal Revenue Code of 1986, as amended (the “Code”). Section 83 of the Code governs the transfer of property in connection with the performance of services, including in the case of an employer granting stock or other property to employees or other service providers. The final regulations affect taxpayers who receive such property in connection with their performance of services subject to vesting and choose to make an election to include the value of substantially nonvested property in the taxpayer’s gross income in the year of the transfer.
The general rule under Section 83(a) of the Code requires the taxpayer providing services to include in gross income for the year during which the property vests the excess of the fair market value of the transferred property over the amount the taxpayer paid (if any) for the property. Section 83(b) allows taxpayers to elect to instead include the property, as compensation for services, in their gross income for the year during which the property was transferred based on the fair market value of the property on the date of the election. The benefit of the election is that it locks in the compensatory element of an equity grant or other property transfer based on a hopefully lower valuation and allows any future appreciation to be generally taxed at favorable capital gains rates. A valid election must be made in accordance with IRS regulations.
Previously, the regulations required taxpayers making a Section 83(b) Election to:
File the Section 83(b) Election with the IRS within 30 days of the property transfer;
Attach a copy of the Section 83(b) Election to the taxpayer’s federal income tax return filed with the IRS for the taxable year of the property transfer; and
Submit a copy of the Section 83(b) Election to the employer or other service recipient.
In 2015, the IRS proposed regulations eliminating the second requirement to file a copy of the Section 83(b) Election with the taxpayer’s tax return and acknowledged that this filing requirement discouraged electronic filing of tax returns because Section 83(b) Elections cannot be filed electronically. Taxpayers who made a valid Section 83(b) Election for transfers of property on or after January 1, 2015 and before January 1, 2016 may continue to rely on the proposed regulations, which have been finalized without modification. The final regulations apply to property transferred on or after January 1, 2016.
The elimination of the requirement to file a copy of the Section 83(b) Election with an electing taxpayer’s tax return particularly benefits non-U.S. individuals receiving property subject to vesting who anticipate later becoming U.S. residents. Before these regulations became effective, electing non‑resident individuals were arguably required to file a U.S. federal income tax return in order to make the election, even if they did not otherwise have any U.S. reporting obligations.