Most technology companies offer stock-based compensation. If you are an employee that can benefit from a company that does, you probably have heard of the 83(b) election.
The basic premise of Internal Revenue Code Section 83 is simple. It states that if you receive property in exchange for services, the difference between the value of the property received (stock), and what you paid for it, if anything, is taxable income (generally wages). However, if you receive the stock subject to a restriction (like a vesting schedule), then the taxable event occurs later when the restriction lapses (when the stock becomes vested). Any change in the stock’s value during this time will either increase or decrease the taxable event when the restriction lapses.
This is when Section 83(b) can be utilized to your benefit or detriment. If you think the value of the stock will increase while you wait, which most people do, then 83(b) allows you to accelerate the taxable event and include the income on the earlier exercise date, before the date of restriction lapses. When the restriction lapses, there is no taxable event, and… Continue here »
KROST Quarterly is a digital publication that highlights some of the hot topics in the accounting and finance industry. Volume 3, Issue 1 highlights some of the hot topics in the technology industry, including technology trends in media entertainment, privacy laws, 83(b) elections, R&D tax credits for software development, quantum computing, and more.
About the Author
Robert J. Gosart, CPA, Director
Tax, International Tax, Tax Controversy, Technology
Robert (Bob) Gosart is a Tax Director at KROST. Bob has 40 years of experience providing tax advice and compliance services to clients in a variety of different businesses and industries. His areas of focus include high net worth individuals and their closely held businesses; entity selection; real estate; S corporations; buying and selling a business; tax controversy; and international taxation. » Full Bio