Section 83 (b) for Startups

Learn how Section 83(b) helps startups save on taxes!

Once upon a time, in Startupville, there lived a group of enthusiastic entrepreneurs ready to take on the world. Startups have big dreams and bright ideas, but only some use a secret weapon called Section 83(b) that makes their startup journey even more magical. 

Picture this: you're a startup founder, just starting to spread your entrepreneurial wings. You offer your team members a sprinkle of stardust in the form of stock options. But wait, there's a catch! Without the power of Section 83(b), those options could turn into a pumpkin.

Section 83(b) swoops in offering a magical solution. It allows startup heroes to file a special form with the IRS, declaring their intent to be taxed on the fair market value of their stock options at the time of grant rather than when they vest. Sounds like a bunch of financial mumbo-jumbo, right? Leave your worries, and the Arbo Team shall unravel its enchanting secrets.

E.g., assume a brand-new company with two founders who are granted 1,000 shares, with a price at the founding of 1 cent, on a two-year vesting plan. Their income tax rate is 33%, and the long-term capital gains rate is 20%.

Section 83b tax impact


So not only does the 83(b) election in this example save the founder $10,000, but nearly the entire burden is shifted into the final year when they are likely to be more capable of handling a big tax bite.

Now, it's important to remember that with great power comes great responsibility. You or your employee's 83(b) election should be postmarked and mailed to the appropriate IRS office within 30 days of purchasing your stock grant or early exercise date. It requires careful consideration and consultation with a tax professional, and using the Arbo Software can help guide you. Fear not; we shall be your trusted sidekick, ensuring you make the right moves in this daring tax-saving adventure.

So, if you find yourself in the wondrous land of startups, remember the power of Section 83(b). It's like having a magic wand that allows you to control the tax consequences of your stock options. With this mighty tool in your arsenal, you can save taxes, embrace early-stage valuations, and dance through the startup journey with a lighter heart.

Let's dive into the enchanting world of ISOs, NSOs, and RSAs and discover why filing an 83(b) election is your secret weapon!

First, we have ISOs and NSOs, the dynamic duo of stock options. When you exercise your options early and file an 83(b) election, it's like harnessing the power of time travel. You get to lock in the price difference between your options' strike price and their Fair Market Value (FMV) without paying taxes on any future increase. It's like a tax-free ride on a magical unicorn!

But beware, If you don't file the election, the tax consequences can be like encountering a fire-breathing dragon. With an 83(b), you may avoid higher taxes as the FMV of your options increases over time. It's like missing out on a golden opportunity and paying a higher price later. Nobody wants that!

Now, let's talk about RSAs, the restricted stock awards. These treasures are often given to founders and early-stage employees. Imagine receiving these precious RSAs at a nominal value, like finding a rare gem for just a few pennies. By filing an 83(b) election, you're saying, "Hey, tax authorities, I recognize the small value of these shares upfront!" It's like paying a small fee to the taxman.

And here's the unique part: When you eventually sell those RSAs, you'll be subject to capital gains tax on the difference between the FMV at the time of sale and the nominal value. Who said taxes couldn't be magical?

And so, our tale of Section 83(b) ends. But remember, as you venture into the startup realm, keep this enchanting knowledge close to your heart. Embrace the power of Section 83(b), and let us be your guiding star on the path to financial success.

May your startup adventures be filled with stress-free, zen, and seamless tax-saving magic. Onward, startup heroes and Section 83(b) may be your loyal companion on this whimsical journey!


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