The Advisors' Blog

The IRS has finally rolled out a way to submit Section 83(b) elections through an online filing system. Until very recently, taxpayers were obligated to write a letter to the IRS to claim the Section 83(b) election and mail that letter to their designated IRS office within 30 days.

Here’s a quick explanation of what’s changed, thanks to Dave’s recent article in The Corporate Executive newsletter.

The IRS adopted a one-page standard form for a Section 83(b) election that incorporates the requirements of Treasury Regulations Section 1.83-2 and IRS Revenue Procedure 2012-29 (Form 15620). This is a streamlined way to notify the IRS of the election, but taxpayers are still permitted to use alternative forms.

The adoption of IRS Form 15620 paved the way for electronic filing of Section 83(b) elections, which the IRS launched earlier this year. Taxpayers who want to submit the election online must sign in or create a new account on the IRS’s ID.me page, complete IRS Form 15620 on the IRS website and then either submit the completed form electronically (preferred method) or download the completed form and file it by mail.

This Sidley alert highlights some quirks of the online filing system that filers and companies should be aware of:

A cap on quantity. Each online filing currently accepts a maximum of 999,999 securities per submission. Very large founder grants and early-exercise option exercises can exceed this.

Two-decimal input for per-security values. The online form only allows two decimal places for the fair market value per security and the amount paid per security. This could be a problem for many typical startup early common stock prices (e.g., US$0.0001 per share) and a source of rounding noise in the form’s auto-calculated totals.

With these issues in mind, the alert suggests:

– Quantity: If your grant runs over [the] limit, consider filing by mail on paper Form 15620 (or a compliant letter election) to preserve accuracy and avoid partial filings until the online tool is updated.

– Per-security value: In our view, where the amounts are not material, rounding in a manner that is most conservative from a tax perspective is the better approach. The election’s legal effect is to include in income the difference between the fair market value and the purchase price of the underlying security as of the transfer date (thus eliminating the need to later include the value of the underlying securities in income as they vest), so if the per security purchase price is a fraction of a cent the total purchase price (or taxable spread) may not be material.

Additionally, a filer’s actual cost basis and consideration paid and actual fair market value determinations are evidenced by the grant/purchase documents and other records and should be reflected on the applicable tax return, as well as in the company’s records. (For avoidance of doubt: keep precise calculations and documentation in your files, and if the chosen rounding convention results in a material difference in basis or taxes consider doing a paper filing with the correct fractional purchase price and/or correct fractional fair market value.)

– Meredith Ervine