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Guide to 83(b) Elections

  • Writer: Langston Tolbert
    Langston Tolbert
  • Nov 3, 2024
  • 2 min read

Maximize Your Equity Potential: Understanding the Tax Benefits and Risks of the 83(b) Election


Introduction

For companies offering equity as a key component of compensation, the 83(b) election remains a valuable tax strategy. This option allows individuals to pay taxes on restricted stock at the time of issuance rather than vesting, which can yield tax savings if the company’s valuation rises. However, it also carries risks that companies should help employees understand.


Steps to Consider for an 83(b) Election in 2025


  1. Assess Financial Outcomes

    • Why It Matters: Employees at smaller companies face financial risks if stock value does not increase as anticipated. Assessing this risk before filing the 83(b) election is crucial.

    • Actionable Step: Offer employees resources to model potential outcomes, helping them make an informed choice about whether an 83(b) election aligns with their financial goals.


  2. Ensure Timely Filing

    • Why It Matters: The IRS requires 83(b) elections to be filed within 30 days of stock issuance. Missing this deadline means losing the tax advantage, so proactive planning is essential.

    • Actionable Step: Develop a checklist for employees receiving restricted stock and ensure HR and legal teams work together to meet IRS deadlines.


  3. Address Liquidity Needs

    • Why It Matters: Paying taxes on restricted stock can strain cash flow, particularly for employees at companies with more limited liquidity.

    • Actionable Step: Offer guidance or assistance in obtaining financing if necessary, so employees can manage tax obligations without cash flow issues.


Conclusion

An 83(b) election can provide significant tax benefits but requires careful consideration. Companies in the $5-$50 million range should support employees with the resources they need to evaluate this option effectively.


Learn more about 83(b) elections and their potential advantages for 2025 →

 

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