Question

1. If an employee is awarded stock with a 2-year vesting period, what are the advantages and disadvantages to the employee to making a Section 83 election? How is this election made? Does the election (or lack of election) impact the employer?

2. The following statement is true: Lapse restrictions affect the timing, but not the amount, of compensation recognized under Section 83. Nonlapse restrictions affect the amount, but not the timing, of compensation recognized under Section 83. Explain why this is true.

Answer 1

1. Under the Internal Revenue Code, a transfer of property in connection with the performance of services by an employee or other service provider will generally result in the recognition of compensation income at ordinary rates when the property is either transferable or not subject to a substantial risk of forfeiture. This basic rule can bring about undesirable tax results in many contexts, including the compensatory transfer of restricted stock. In addition, the difference between federal ordinary-income tax rates versus capital gains rates has caused many recipients of restricted stock to focus on whether there are effective strategies to take advantage of the difference between these tax rates. One possible way to address these matters is for the employee or other service provider to make a 'Section 83(b)' election (under Section 83(b) of the Code) to have income recognized at the time restricted stock is granted. However, there are pros and cons to the making of such an election, and the election will therefore not always be preferable from a planning perspective. This topic helps issuers and service providers alike understand the rules governing the taxation of restricted stock, and the manner in which a Section 83(b) election might or might not be helpful to their tax-planning efforts. This material will include a discussion of certain specific situations in which the election might be particularly beneficial.

1. Complete a Section 83(b) election letter—a sample form can be found here.
2. Mail the completed letter to the IRS within 30 days of your grant date:

• Mail to the IRS Service Center where you file your tax return—the address for your IRS Service Center can be found here.
• Preferably send the letter by certified mail and request a return receipt.

1. Mail a copy of the completed letter to your employer.
2. Retain one copy of the completed and filed letter for your records and retain proof of mailing.

As always, founders should consult with their tax advisors to determine how a Section 83(b) election applies to their individual circumstances.

Yes, section 83 election effects employer.

2. True:

Lapse restrictions affect the timing because , restrictions are expired within particular time. Non lapse restrictions will affect compensation as there wont be any timing restrictions.