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Editorial 9 MIN READ

The §83(b) election in 2020: still paper, still 30 days, still unforgiving

Two years into TCJA, the mechanics have not changed and the horror stories have not stopped

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 8 sections
  1. What the election still does
  2. TCJA changed the rate tables, not the mechanics
  3. What RSUs still are not
  4. The paper-filing problem, going into year three of non-modernization
  5. The 30-day clock, repeated because this is where people die
  6. The 2016 change that still confuses taxpayers
  7. The horror stories have not stopped
  8. Sources

ou have 30 calendar days to postmark an §83(b) election, and in January 2020 the mailing mechanics are exactly what they were in 2017, 2010, and 1995. The IRS has not built an e-filing channel. There is no online portal. A founder with a $400 founder-stock purchase and a $10 certified mail slip is running the same paper protocol Treasury wrote into the regulations during the Carter administration.

This piece updates our 2017 §83(b) guide for what has and has not changed through the two full tax years since the Tax Cuts and Jobs Act. The short version: the §83(b) election is still worth filing, §199A does nothing for restricted stock or RSUs, and the 30-day window remains the single most unforgiving deadline in private-company tax administration.

What the election still does

Section 83(a) of the Internal Revenue Code taxes the recipient of property transferred in connection with services on the spread between what the recipient paid and the fair market value of the property, recognized at the moment the property is no longer subject to a substantial risk of forfeiture. For founder stock with a standard four-year vest, that is four years of ordinary-income events, each one pegged to whatever the 409A valuation happens to be on the vesting date.

Section 83(b) lets the recipient opt out of that default. File a written statement with the IRS within 30 days of the property transfer and the recipient is taxed now, on today's spread, and not taxed again as the stock vests. Every dollar of appreciation after the election date becomes long-term capital gain if the recipient holds for a year.

The arithmetic is the same as it has always been. If the transfer happens at founding, the spread between purchase price and fair market value is typically measured in hundreds of dollars or less, the tax owed on the election is effectively zero, and the recipient converts what would otherwise be millions of dollars of future ordinary income into long-term capital gain. The regulation that authorizes the election is Treas. Reg. § 1.83-2, and nothing in the 2017 tax reform touched it.

TCJA changed the rate tables, not the mechanics

The Tax Cuts and Jobs Act, Pub. L. 115-97, took effect January 1, 2018. For §83 purposes it did two relevant things and one irrelevant one. It cut the top ordinary-income rate from 39.6% to 37%. It preserved long-term capital gains at 20% (plus the 3.8% net investment income tax where applicable). And it created § 199A, the 20% deduction for qualified business income from pass-through entities.

Section 199A does not apply to restricted stock or to restricted stock units. The statute excludes "reasonable compensation paid to the taxpayer by any qualified trade or business for services rendered with respect to the trade or business" from qualified business income, and Treasury's final regulations under T.D. 9847, published February 8, 2019, read the exclusion broadly enough that employee equity compensation never qualifies. The gap between ordinary rates and capital-gains rates is still large, and the §83(b) election still closes it. The deduction that dominated every tax-planning conversation for two years did not narrow the reason to file.

What the rate cut did change, slightly, is the break-even on late-stage elections. At a 37% top rate, the ordinary-income tax owed on a large spread between purchase price and fair market value is meaningfully smaller than it was at 39.6%. An §83(b) election on a grant where the company has already raised a priced round can make sense in 2020 where it would have been expensive in 2016, particularly for founders who can write the check. That is a calculator exercise with a qualified CPA, not a default move.

What RSUs still are not

The §83(b) election is only available for actual property transfers. It is not available for restricted stock units, because an RSU is not property. The definition that controls is Treas. Reg. § 1.83-3(e), which says "property" includes real and personal property other than money or "an unfunded and unsecured promise to pay money or property in the future." An RSU is precisely that promise. The grantee has a contractual right to receive stock at a future settlement date, not stock today. There is nothing to elect into.

This trips up engineers every year. A mid-stage company hires a new director at a grant of 40,000 "RSUs," the new hire reads about §83(b) online, sends a certified letter to the IRS within 30 days of the grant memo, and feels clever. The election has no effect. Ordinary income will still be recognized on each tranche at settlement, valued at the fair market value of the stock on the settlement date. The letter sits in a file at a service center in Ogden or Kansas City and does nothing.

The distinction that matters is the word "unit." Restricted stock, without the unit, is a present transfer of shares subject to forfeiture; the §83(b) election applies. Restricted stock units are a deferred-compensation promise; the §83(b) election does not. Any grant document the recipient cannot find the word "unit" in, on the first page or the second, should be presumed to be actual stock for §83 purposes. A grant where "unit" appears is almost certainly not §83 property. When in doubt, ask the company's counsel in writing which one it is, and keep the answer.

The paper-filing problem, going into year three of non-modernization

The §83(b) election has to be on paper, signed in ink, mailed to the IRS service center where the taxpayer would file a Form 1040. There is no e-filing option as of January 2020. There is no secure-upload portal. There is no dedicated fax number that counts as filing. The taxpayer prints the election, signs it, puts it in an envelope, addresses it to the correct service center, and hands it to a USPS clerk to be postmarked.

The service-center address is set by the taxpayer's state of residence and is published annually in the Form 1040 instructions. The IRS consolidated several processing centers during the 2010s and continued to shuffle addresses through 2019; the address printed in an old firm template is frequently the wrong one. Check the current Form 1040 instructions, or the "Where to File Paper Tax Returns" page on irs.gov, before sealing the envelope.

Send it by certified mail, return receipt requested. The regulation does not require certified mail. The reason every competent lawyer insists on it is IRC § 7502, the "timely mailing as timely filing" rule. Section 7502 treats the postmark as the filing date only if the postmark can be proved. A certified-mail receipt stamped by a USPS clerk is the cleanest proof available; a return receipt is the evidence the service center actually took delivery. Staple the green card and the certified-mail receipt to the retained copy and store all three somewhere a future CPA or acquirer's counsel can find them in five years.

The failure mode founders keep hitting is assuming that the law firm or formation service mailed it. In several cases we have seen, a firm paralegal drafted the election, emailed it to the founder for signature, and then did nothing further because the founder was supposed to sign and mail it. The founder, thinking the firm would handle mailing, did nothing. Day 31 arrived. No one had a postmark. The election was waived. No fix existed. Watch the receipts come back in your own mailbox.

The 30-day clock, repeated because this is where people die

The 30-day window runs from the date the property was transferred to the recipient, counting calendar days, with day one being the day after transfer. The transfer date is the date the recipient acquired a beneficial interest in the stock, which in the founder-stock case is typically the date the restricted stock purchase agreement was signed and the purchase price was paid. It is not the date the board approved the grant. It is not the date on the stock certificate. It is not the date the cap table was updated.

If day 30 falls on a Saturday, Sunday, or federal holiday, IRC § 7503 rolls the deadline to the next business day. Do not run it that close. Treat the 30th calendar day as the hard stop and mail by day 28 if anything else is on your calendar.

There is no extension available. There is no reasonable-cause relief. The IRS has no statutory authority to accept a late §83(b), and the private letter rulings that say so keep arriving with the same answer. A taxpayer who postmarks on day 31 has the same tax position as a taxpayer who never filed.

The 2016 change that still confuses taxpayers

Through 2015, the regulations required the taxpayer to attach a copy of the §83(b) election to the federal income tax return for the year of transfer. Treasury removed that requirement in T.D. 9779, 81 Fed. Reg. 48708 (July 26, 2016), applicable to property transferred on or after January 1, 2016. The rationale was electronic filing; Form 1040 e-filing cannot cleanly handle arbitrary PDF attachments, and the attachment step was creating failed filings.

Two things did not change. The 30-day certified mailing to the service center remains required, and the taxpayer's obligation to retain a copy of the election until the statute of limitations runs on the relevant return remains in place. "I filed an §83(b) four years ago" is not a defensible position at audit without the retained copy and the certified-mail evidence. The 2016 change removed a filing step for the current-year return. It did not remove the paper trail the recipient must keep.

The horror stories have not stopped

In roughly the last eighteen months of cases we have observed, the recurring failure modes have been consistent. The employee received restricted stock as part of an acquihire and did not realize §83(b) applied because the grant document called the shares "restricted stock units" in the email subject line and "restricted stock" in the award agreement. The founder filed the election but sent it to the Austin address printed on a 2014 template instead of the current Kansas City address. The co-founder mailed by certified mail on day 30, got the green card back with a receipt stamp of day 31, and discovered that handing the envelope to a USPS clerk at 4:58 p.m. is not the same as getting a same-day postmark. The law firm emailed the signed election to its own document-management system and never put it in an envelope.

Every one of these is fixable in advance and unfixable after. The infrastructure the IRS operates around §83(b) is unchanged from a decade ago, and the electronic-filing reforms that are plainly coming for most of the tax system have not arrived here. A taxpayer who treats this election like a modern filing, rather than a 1978-era paper transaction, will eventually miss.

Rule of thumb: if you received restricted stock (not units) that could be forfeited, mail a §83(b) by certified mail with return receipt to the current Form 1040 service-center address within 30 calendar days of the transfer, and keep the green card, the mailing receipt, and the retained copy together until the statute of limitations runs. Nothing about 2020 changes that protocol, and nothing the IRS has announced suggests 2021 will.

Sources

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