On November 7, 2024, the Internal Revenue Service (IRS) unveiled a significant development for taxpayers looking to make Section 83(b) elections. The IRS introduced Form 15620, a standardized form for electing under Section 83(b) of the Internal Revenue Code (IRC) to treat unvested property received in connection with services as taxable upon receipt. Prior to this, taxpayers had to draft their own election letters, which led to uncertainty about whether those letters included all the necessary information for a valid election. The release of Form 15620 simplifies this process, but it’s important to understand the broader context of Section 83(b) elections and how this new form fits within the existing regulatory framework.

What is a Section 83(b) Election?

A Section 83(b) Election is a provision under the IRC that allows a taxpayer to elect to include in gross income the fair market value of property received in connection with the performance of services at the time of receipt, rather than waiting until the property vests. The typical scenario involves the receipt of unvested property, such as stock or other equity interests, which are subject to a vesting schedule over time. Instead of deferring tax liability until the property vests, a taxpayer can opt to accelerate income recognition by making the Section 83(b) election.

By electing to recognize income immediately, the taxpayer can potentially reduce future tax liabilities if the value of the property increases over time. This is particularly useful for employees or service providers receiving equity interests in early-stage or startup companies, where the value of the property is low at the time of the grant but expected to rise significantly over time.

For example, if a taxpayer receives stock in a startup company with a vesting schedule and the stock is worth $1 per share at the time of receipt, making the Section 83(b) Election would allow the taxpayer to report $1 per share in income. If the stock’s value increases to $10 per share by the time it vests, the taxpayer would not be taxed on the $9 increase in value at vesting but would rather recognize any future appreciation as a capital gain (if held for more than one year).

The Benefits of Making a Section 83(b) Election

The primary benefit of making a Section 83(b) Election is the ability to accelerate income recognition at the time the property is received, rather than when it vests. This strategy can be especially valuable for taxpayers who receive equity in a company with a low fair market value at the time of receipt, as it allows them to lock in a lower tax liability. The key benefits include:

• Lower Income Tax at the Time of Grant: If the property has a low value when granted (for example, startup stock), the immediate tax impact will be minimal compared to waiting until the property vests, when its value may have significantly increased.
• Potential Capital Gains Treatment on Appreciation: When the property is eventually sold, any additional appreciation over the original fair market value recognized under the Section 83(b) election will generally be taxed as long-term capital gains, assuming the property is held for more than one year.
• Predictability and Tax Planning: By electing to recognize income early, taxpayers can better predict and plan for their future tax liabilities, especially if they expect the property to appreciate significantly in value.

When Should a Section 83(b) Election Be Made?

The Section 83(b) Election must be made within 30 days of the transfer of property. This time frame is strict—if the election is not filed within the 30-day period, the taxpayer loses the opportunity to make the election for that year. The election must be filed with the IRS by mail (currently), and a copy of the election must also be provided to the taxpayer’s employer or the entity granting the property. The IRS has not yet provided an option for electronic filing of Section 83(b) Elections, although this is expected in the future.

It’s important to note that the election is irrevocable, meaning that once it is made, the taxpayer cannot reverse the decision. Therefore, careful consideration must be given to the potential tax consequences of making the election, especially if the taxpayer is unsure about the future appreciation of the property or the financial stability of the entity granting the property.

The New IRS Form 15620

Prior to the introduction of Form 15620, taxpayers wishing to make a Section 83(b) Election had to draft their own election letters. This self-drafted process presented some uncertainty because it was not always clear whether the letters included all the necessary information required by the IRS to make a valid election. According to the IRS’s Treasury Regulation Section 1.83-2 and Revenue Procedure 2012-29, specific information is required for an election to be valid, and missing or incorrect details could lead to the election being disqualified.

Form 15620 is designed to address these concerns by providing a standardized format that ensures all required information is included in the election, increasing the likelihood that the election will be valid. The form includes fields for all necessary details such as:

• The taxpayer’s name, address, and taxpayer identification number (TIN)
• A description of the property transferred, including the number of shares or units, and the date of transfer
• The fair market value of the property at the time of transfer
• The amount paid for the property, if any
• A statement that the taxpayer is making the Section 83(b) Election

While the IRS’s release of Form 15620 does not change the requirements for making the election under Treasury Regulation Section 1.83-2, it does provide a streamlined way to ensure compliance with those requirements. Taxpayers who wish to use Form 15620 can choose to do so, but it is not mandatory. Taxpayers can still opt to file self-drafted election letters if they prefer.

Filing a Section 83(b) Election with the IRS

Regardless of whether a taxpayer uses Form 15620 or a self-drafted election letter, the Section 83(b) Election must be filed with the IRS office where the taxpayer files their tax return. The filing must be done by mail, and the election must be submitted no later than 30 days after the property is transferred to the taxpayer.

In addition to filing the election with the IRS, the taxpayer must also provide a copy of the election to the entity transferring the property. This is typically the employer or the company granting the equity or profits interest.

It is important to remember that the 30-day deadline is absolute. There are no extensions available for the filing of a Section 83(b) Election, and failure to file within the prescribed time frame results in the loss of the election option for that year. If a taxpayer misses the deadline, they will be taxed on the property when it vests, which may result in a higher tax liability if the property has appreciated in value.

Future Developments: Electronic Filing

Currently, Form 15620 must be filed by mail. However, it is anticipated that the IRS will eventually offer an electronic filing option for Section 83(b) Elections. This would make the process more efficient and reduce the administrative burden on taxpayers and the IRS. While no official timeline has been provided for when electronic filing will become available, taxpayers should stay informed of updates from the IRS regarding this potential development.

The introduction of IRS Form 15620 is a positive step toward simplifying the Section 83(b) Election process for taxpayers. While taxpayers are not required to use the new form and can still file self-drafted election letters, the standardized format provides clarity and certainty regarding the necessary information for a valid election.

Taxpayers should carefully consider whether making a Section 83(b) Election is in their best interest, taking into account their tax situation and the future potential value of the property. As the IRS continues to modernize the tax filing process, taxpayers can look forward to potential updates, such as electronic filing, that will further streamline compliance with Section 83(b) Elections.