Saving tax on restricted stock awards with the Sec. 83(b)

This article organizes the original guidance on saving tax on restricted stock awards with the sec. 83(b) election into clear sections for easier reading and reference.

Overview

This opening section presents the main context from the original post.

Many employees receive stock-based compensation from their employer as part of their compensation and benefits package. The tax consequences of such compensation can be complex and subject to ordinary-income, capital gains, employment and other taxes.

But if you receive restricted stock awards, you might have a tax-saving opportunity in the form of the Section 83(b) election.

Convert ordinary income to long-term capital gains

This section keeps the original guidance focused on convert ordinary income to long-term capital gains.

Restricted stock is stock your employer grants you subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk (that is, it’s vested) or you sell it.

At that time, you pay taxes on the stock’s fair market value (FMV) at your ordinary-income rate. The FMV will be considered FICA income, so it also could trigger or increase your exposure to the additional 0.9% Medicare tax.

But you can instead make a Sec. 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.

The Sec. 83(b) election can be beneficial if the income at the grant date is negligible or the stock is likely to appreciate significantly. With ordinary-income rates now especially low under the Tax Cuts and Jobs Act (TCJA), it might be a good time to recognize such income.

Weigh the potential disadvantages

This section keeps the original guidance focused on weigh the potential disadvantages.

There are some potential disadvantages, however:

• You must prepay tax in the current year, which also could push you into a higher income tax bracket or trigger or increase the additional 0.9% Medicare tax. But if your company is in the earlier stages of development, the income recognized may be relatively small.
• Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or sell it at a decreased value. However, you would have a capital loss in those situations.
• When you sell the shares, any gain will be included in net investment income and could trigger or increase your liability for the 3.8% net investment income tax.

It’s complicated

This section keeps the original guidance focused on it’s complicated.

As you can see, tax planning for restricted stock is complicated. Let us know if you’ve recently been awarded restricted stock or expect to be awarded such stock this year. We can help you determine whether the Sec. 83(b) election makes sense in your specific situation.

Related Resources

These resources connect the article topic with related Bowers service pages and approved professional reading.

• Tax Services
• Business Strategy & Growth
• Business Valuation
• Mergers & Acquisitions
• Harvard Business Review
• Accounting Today

FAQ

The questions below summarize the main points already covered in the article.

What is the main focus of Saving tax on restricted stock awards with the Sec. 83(b) election?

The article focuses on saving tax on restricted stock awards with the sec. 83(b) election and organizes the original guidance into sections for easier review.

What topics does the article cover first?

The article begins with convert ordinary income to long-term capital gains and then continues through the remaining points in the original post.

Which additional areas are included?

Additional sections include weigh the potential disadvantages, it’s complicated.

Does the post include action items or reminders?

Yes. The original post includes listed items that have been kept in list format for easier scanning.

Was the original post wording changed?

The revision keeps the author wording and updates the structure so the post is easier to read online.