Can an Entity Make an 83(b) Election?

An 83(b) election is a decision under the Internal Revenue Code to alter the timing of taxation for property received for services. When property, such as company stock, is granted with restrictions like a vesting schedule, it is not taxed until those restrictions lapse. The 83(b) election allows the recipient to be taxed on the property’s value at the time it is granted, rather than waiting for it to vest. This can be beneficial if the property is expected to increase in value.

Eligibility for the 83(b) Election

The ability for a business to make an 83(b) election is permitted if the entity is the “person” performing the services. While this is commonly an individual, the tax code’s definition is broader. Internal Revenue Code Section 83 does not limit the term “person” to natural individuals, meaning an entity like a corporation, partnership, or LLC can be the service provider.

If a business entity enters an agreement to perform services and receives restricted stock as part of its compensation, it is the service provider. In this scenario, the entity itself is eligible to make the 83(b) election. For example, if a consulting firm operating as an S-Corporation contracts with a tech startup and receives restricted shares as part of its fee, the S-Corporation is the service provider and can file the election.

Tax Implications for an Entity Making the Election

When an entity makes an 83(b) election, it triggers immediate tax consequences. The entity must recognize ordinary income in the year the property is granted, calculated as the fair market value (FMV) of the property on the grant date, less any amount paid for it. This accelerates the tax event, which would otherwise be deferred until the property vests.

For example, if a marketing LLC receives 10,000 restricted shares in a client’s company as payment, and the shares have an FMV of $1 per share on the grant date, the LLC pays nothing for them. By filing an 83(b) election, the LLC must immediately include $10,000 as ordinary business income on its tax return for that year.

The election also establishes the entity’s tax basis in the property. In the previous example, the LLC’s basis in the 10,000 shares becomes $10,000. Any subsequent appreciation in the value of the shares will be treated as a capital gain when the entity sells them. If the shares increase in value to $5 per share and are later sold, the entity would recognize a capital gain of $40,000, which is taxed at more favorable rates than ordinary income.

Procedural Requirements for an Entity’s Election

Filing an 83(b) election requires following strict procedural rules. The entity must file an election statement with the Internal Revenue Service (IRS) no later than 30 days after the date the property was transferred. This 30-day window is inflexible; missing it eliminates the opportunity to make the election. The IRS provides the optional Form 15620, “Section 83(b) Election,” for this purpose.

The election statement must contain specific information, including:

• The entity’s name, address, and Employer Identification Number (EIN)
• A clear description of the property received
• The date of the transfer and the property’s fair market value at that time
• Details of any restrictions attached to the property, such as vesting conditions

The statement must be filed by mail with the IRS service center where the entity files its annual income tax return, as there is currently no option for electronic filing. It is advisable to use certified mail with a return receipt for proof of timely filing. In addition to filing with the IRS, the entity must provide a copy of the election statement to the company that transferred the property and attach a copy to its own federal income tax return for the year the property was granted.