Appraisal Economics performs valuations to assist taxpayers’ compliance with Section 83(b) of the Internal Revenue Code. We appraise the fair market value of common and restricted stocks, options, and other investment securities so that clients can determine whether an 83(b) election is beneficial. The taxpayer can then support their 83(b) election with the IRS using our appraisal report. Section 83(b) allows individuals who receive unvested securities (such as restricted shares granted as stock-based compensation) to elect to pay tax when the securities are granted, rather than when they vest. The tax is computed based on the fair market value at the time of the grant, which Appraisal Economics can determine. There are several potential benefits of making an 83(b) election:
1) If the security appreciates after being granted, ordinary income tax rates will have been paid when the shares had a much lower value, reducing the amount of taxes paid at the higher ordinary income rates. When the shares are ultimately sold, more of the gain will be taxed at lower capital gains rates, increasing the after-tax proceeds. An 83(b) election may result in a lower amount of total taxes ultimately being paid if the securities appreciate.
2) The individual only pays ordinary income taxes on one date and knows the amount before choosing to make the election. If an 83(b) election is not made and the stock appreciates significantly, the ordinary income taxes due on the future vesting days may be much higher (and won’t be known until years later, making it difficult to plan). If the securities are illiquid, the taxpayer may owe taxes when it is difficult to sell a portion of the securities to satisfy the taxes. An 83(b) election prevents this scenario.
An 83(b) election must be made within 30 days of the date the securities are granted. This is to prevent individuals from retroactively choosing to receive the tax benefits after they already know that the stock has appreciated. An 83(b) election is irreversible; even if the value of the stock decreases, the 83(b) election cannot be undone.
Each individual’s situation is unique. Ask your tax expert if an 83(b) election is appropriate for your circumstances. For more information, please contact Appraisal Economics.