New Form for Section 83(b) Elections

The IRS has issued new Form 15620 which can be used to file Section 83(b) elections. Here’s what you need to know about it.

Background: What Are Section 83(b) Elections?

Section 83(b) elections allow individuals who have received stock under compensatory arrangements that are not vested to elect to recognize income on the arrangements for tax purposes at the time of the transfer, rather than waiting until the stock is vested to recognize this income.

Section 83(b) elections aren’t available for most compensatory equity arrangements because most arrangements don’t allow the underlying stock to be transferred to the holder until the arrangement has vested. Most stock options can’t be exercised until the vesting conditions have been fulfilled. Similarly, the stock underlying restricted stock units isn’t issued to the award holder until the award has vested.

There are, however, some arrangements that allow the holder to acquire stock that is not yet vested. I describe two such arrangements below. For more information on situations where a Section 83(b) election might filed, see  “To 83(b) or Not To 83(b)?”

Early Exercise Options

Early exercise options are stock options that allow the holder to exercise the option before the option has vested. Option holders that choose to take advantage of this opportunity receive stock that is restricted, meaning that the holders can’t sell the stock until the vesting conditions are fulfilled. In addition, if the holders fail to meet the vesting conditions, they will forfeit their underlying stock (and typically receive a refund of the amount they paid for it).

[In most cases, the holders don’t take possession of the stock until the vesting conditions are fulfilled. Although the holders are considered the beneficial owners of the stock and will generally have both voting and dividend rights, the stock is typically held in an escrow or custodial arrangement until vested.]

In this circumstance, the US tax code assumes that the holder will want to wait to pay tax on the stock until the stock can be sold and is no longer subject to forfeiture. But, under Section 83(b), the holder can elect to recognize income at the time of the exercise.

If the option is a nonqualified stock option, the Section 83(b) election accelerates the recognition of compensation income to the exercise date. For incentive stock options, the Section 83(b) election applies only to the income recognized for AMT purposes.

Restricted Stock Awards

A restricted stock award is an arrangement in which the holder receives stock that is subject to vesting restrictions. Unlike an RSU, which is a promise to deliver stock to the holder in the future if the vesting conditions are fulfilled, the shares underlying restricted stock are issued to the holder at grant.

[Just like with early exercise options, holders of restricted stock typically don’t take possession of the stock until the vesting conditions are fulfilled. Although the holders are considered the beneficial owners of the stock and will generally have both voting and dividend rights, the stock is typically held in an escrow or custodial arrangement until vested.]

Normally, restricted stock is subject to tax upon vest, but recipients of restricted stock can elect under Section 83(b) to recognize compensation income for the acquisition of stock at the time the award is granted.

Filing a Section 83(b) Election

Until now, there was no specific form available to file a Section 83(b) election. Instead, taxpayers simply wrote a letter to the IRS explaining that they were making an election under Section 83(b) and included all the information necessary to file the election, as stipulated under Section 83(b) and related Treasury regulations.

This lack of an official election form has resulted in taxpayers sometimes failing to include all the required information in their filings. I also imagine that it makes it more challenging for IRS auditors to review the election filings. In 2012, to help mitigate errors or omissions in Section 83(b) elections, the IRS issued Rev. Proc. 2012-29 to provide a sample Section 83(b) election form.

Now, to make it even easier to file the election, the IRS has created a fill-in form that can be used for this purpose.

New Form 15620

New Form 15620 can now be used to file a Section 83(b) election and includes all information required for the filing. The fill-in form is available for download at the IRS website.

You probably have some questions about the form. Here’s what I know.

Is Form 15620 required now for Section 83(b) elections?

No, the form is not required. Taxpayers can continue to use their own form of election. Form 15620 is simply available as a convenient alternative to drafting your own election form.

When can taxpayers start using the form?

It’s available now on the IRS website, so they can start using it now.

Can Form 15620 be filed electronically?

No. The procedures for filing the election with the IRS have not changed. Taxpayers that want to use Form 15620 for their Section 83(b) elections will need to download the form, fill it out, print it, and mail it to the IRS. The form should be mailed to the service center where the taxpayer files their tax return.

Does the taxpayer still have to provide a copy of the filing to the company?

Yes, even if a taxpayer uses the new form, they still must provide a copy of the filing to the company that issued the stock to them. This is required so that the company can properly report any income the taxpayer recognizes as a result of the filing and can withhold taxes on it, if the taxpayer is an employee.

Does the taxpayer have to include a copy of the filing with their tax return?

No, this is no longer required. Those of you who have been around as long as I have may remember that taxpayers used to be required to include a copy of their Section 83(b) election filings with their tax returns.  Because most taxpayers file their tax returns electronically and 83(b) elections are paper filings, the IRS and Treasury amended the regs under Section 83 to eliminate this requirement back in 2016.

Can Form 15620 be signed digitally?

Yes, although the form must be mailed to the IRS, it can include a digital signature.

Why 15620? Shouldn’t the form be named "Form 83b"?

You’d think so. If I created the form, that's definitely what I would call it (there currently isn't a Form 83 or 83b on the IRS website—I checked. If the form were created by the SEC, that might be what they would call it (e.g., the form for Rule 144 filings is called "Form 144"). But the IRS apparently has a different system for assigning form numbers. Go figure. 15620 is the highest form number currently in use on the IRS website, so I guess it was the next available number. There isn’t a form 15619; the next highest form number is Form 15603.

Thanks to Kim Diemer of Take Stock for alerting me that the IRS had released Form 15620.