You Thought the 83b Was Cool - Check Out the New 83i Elections
Deep in the fine print of the Tax Cuts and Jobs Act of 2017 there was a gift to some employees of young tech/life science companies that are thinking of exercising some of their stock options. The new 83i election basically allows an employee to defer the tax on RSU’s (restricted stock units) or stock options that vest, for up to five years if the election is made timely and filed with the IRS.
There are many constraints on what type of stock qualifies and whether the employee that is making the election can qualify. Here are just a few items to watch for:
- the Company must be privately held
- the Exerciser must be an employee and own <1% of the stock currently and over the last 10 years
- the Exerciser cannot be an executive or member of the family of the exerciser
- the Stock or RSU plan must be offered to at least 80% of the Company’s employees
The 83i election is made by the employee in writing to the IRS much like an 83b election. It must be made within 30 days of either the vesting date of the option or the purchase date of the stock. The deferred tax will be triggered if any of the following occur during the five year deferral period:
- the Employee becomes nonqualified
- the Company goes public
- the Employee revokes the election
Basically, making this election allows employees to exercise options that have vested and not pay the income tax. Note that the income IS still subject to employment related taxes, such as social security. By making the election, the employee can get long term capital gains rates if the employee holds the stock the required holding period without incurring any income tax.
The IRS will have to issue more guidance over the coming months to clarify specific questions that we are already pondering. But if you would like more information on this very exciting election for your employees, feel free to reach out to our tax professionals at 781-453-8700.
Jeff Solomon, C.P.A., C.V.A., Managing Shareholder at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.