83(b) Election vs. Section 83(i) Deferral
When receiving equity compensation at a private company, you have important tax decisions to make. The 83(b) election and Section 83(i) deferral offer different approaches to managing your tax liability on restricted stock.
Understanding the key differences between these options can significantly impact your financial outcome and help you make the best choice for your situation.
Key Takeaways
- Timing Differences: 83(b) elections require action within 30 days of stock grant, while 83(i) deferrals are made within 30 days of vesting.
- Tax Treatment: 83(b) elections trigger immediate taxation on the fair market value at grant, while 83(i) defers taxation for up to 5 years.
- Eligibility Requirements: 83(b) elections are available to anyone receiving restricted stock, while 83(i) has strict company and employee eligibility criteria.
Main Content
Understanding the Core Concepts
Section 83(b) and Section 83(i) represent two distinct approaches to handling taxation on restricted stock. The 83(b) election allows you to pay taxes upfront on the fair market value when granted, potentially reducing your overall tax burden if the stock appreciates. Section 83(i) instead lets qualified employees defer income tax on stock received through equity compensation for up to 5 years after vesting.
Benefits and Advantages
The 83(b) election can provide significant tax savings if your company's stock value increases substantially, as you'll pay taxes on the lower initial value. It's particularly valuable for founders and early employees receiving low-priced stock. Section 83(i) offers flexibility by deferring tax payments, which can be helpful if you need time to build liquidity or expect a liquidation event within the deferral period.
Risks and Considerations
With an 83(b) election, you pay taxes immediately on stock that hasn't vested yet - if you leave before vesting or the stock value decreases, you can't recover those taxes. For 83(i) deferrals, the stock must be from broad-based equity compensation plans, and companies must meet specific requirements around stock options and RSU grants to all full-time employees.
Frequently Asked Questions
Can I use both 83(b) and 83(i)?
No. The Section 83(i) deferral is an alternative for eligible employees at eligible companies and cannot be combined with an 83(b) election for the same grant.
Which has a longer deadline?
The 83(b) has a strict 30-day deadline from the grant date. The 83(i) election also has a 30-day deadline, but it is from the date the stock vests, not when it is granted.
Get Expert Tax Guidance
Making the right choice between an 83(b) election and Section 83(i) deferral requires careful consideration of your specific circumstances, company outlook, and financial goals. A qualified tax professional can help you evaluate these options and make the best decision for your situation.
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