Have you ever been in the grocery store check out line, reached into your pocket, and pulled out a coupon only to find that it had already expired? You may experience a similar feeling magnified, perhaps, by the amount of money involved if you are issued Equity In a corporation, "equity" is often used to refer to the corporation's outstanding stock and stock options.
So what is a Section 83 b election? Put simply, it accelerates your ordinary income tax. To provide some simple tax background, there are different types of tax rates. The maximum ordinary income tax rate in is Because the United States uses graduated tax rates meaning the rates vary based on your income , you may actually be subject to lower rates, but in each case the long-term capital gains rate will be lower than the ordinary income tax rate.
Assuming you paid nothing for your restricted stock, you will be taxed on the value of your restricted stock as determined at grant if a Section 83 b election is filed , or at vesting if no Section 83 b election is filed , in each case at the applicable ordinary income tax rate.
Because the long-term capital gains rate will be lower, the goal here is to get as much of your gain as possible taxed using that rate, rather than the ordinary income tax rate. For simplicity, we will not discuss the employment tax or state tax consequences.
Because you filed a Section 83 b election, you do not have to pay tax when the stock vests, only on the later sale. Your economic gain after tax? In this example you do not file a Section 83 b election. Filing a Section 83 b election also has two other benefits.
Filing a tax code Section 83 b election would immediately cause you tens of thousands of dollars of tax. And if the company subsequently fails, and in particular if it fails before your stock vests, you likely would have been economically better off to not have filed a Section 83 b election. Bottom line — discuss with your individual tax advisor, but remember that the filing must be made if at all within 30 days after the grant date of your restricted stock, as that is an absolute deadline that cannot be cured.
You should contact your tax professional to review your Section 83 b election before filing with the IRS. Please note that the election must be filed with the IRS within 30 days of the date of your restricted stock grant. Failure to file within that time will render the election void and you may recognize ordinary taxable income as your vesting restrictions lapse.
Thank you for reaching out to us. We appreciate you taking the time to provide feedback on Cooley GO. In a corporation, "equity" is often used to refer to the corporation's outstanding stock and stock options. Capital gains is a type of income earned from selling a capital asset or security that may be subject to favorable income tax rates.
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