AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
83(b) for ISO
Posted by: anshu0203, January 30, 2015 01:15AM
Hi,

I'm a newbie to the start-up/equity world.

My company granted me some equity stocks (ISO) with 4 year vesting period when i joined. Its already been 1.5 yrs+ and i have not exercised any stocks so far.

Also the strike price per share has not changed since i joined.

Questions -

1) Can i elect 83b for ISO?

2) If yes, can i use this 83b option for both vested and non vested shares (1/4th of the share are already vested now)?

3) When should i elect or opt for 83B. Before exercising the shares or after that ?

4) Are there any other tax complications involved ?

--Thanks

Re: 83(b) for ISO
Posted by: Kaye Thomas, January 30, 2015 05:10AM
1. The 83b election for ISO affects only the AMT consequences. Usually that's all that matters anyway, because you're planning to hold the shares long enough to avoid a disqualifying disposition, which means there would be no consequences under the regular income tax.

2. The point of the 83b election is to treat unvested shares as if they were vested. It doesn't apply to vested shares, but you don't need it to apply to them because it would be redundant.

3. It's best to file it the same day you exercise the option so there's no risk of missing the deadline, which is 30 days after you exercise. Do not miss this deadline. You do not want to be in the position of having exercised an unvested ISO on pre-IPO stock without having a valid 83b election in place. (I just helped someone in that situation, and it was a costly mess.)

4. Make sure you file the election within 30 days of exercising the option and then also make sure you attach a copy of the election when you file your 2015 income tax return next year. Those are the key points. In exercising the option now, you're reducing the tax bite you'll have later if the company prospers and you're able to cash in for a profit. The downside is that pre-IPO companies are always risky and you could lose the money you pay to exercise the option.

Kaye Thomas
Fairmark.com

Re: 83(b) for ISO
Posted by: anshu0203, January 30, 2015 06:21AM
Thank-you so much Kaye for clarifying my concerns.

Please verify/correct my below understanding/s

1) As 1/4th of my ISO are already vested, this means i can not file 83b for these stocks and i have to keep on paying short/long term taxes every year (if FMV keeps on increasing).

2) For the remaining 3/4 ISO's, if my company gives me early exercise option - then only i can file 83b.

3) If my company doesn't provide me with early exercise option - what are my options?

Thanks once again

Anshu

Re: 83(b) for ISO
Posted by: Kaye Thomas, January 30, 2015 08:43PM
1. Your situation for the part of the ISO that is vested is not a problem, and does not require you to pay taxes every year when stock value increases. If you want, you can exercise the vested portion of your option now, even if the company does not allow early exercise, because this portion is vested. You don't need the 83b election for this portion of the option because the only thing the 83b election does is treat your stock as if it is vested, and these shares are already vested.

2. If the company permits early exercise and you choose to follow that course, you should file the 83b election when you exercise that portion of the option.

3. If the company doesn't permit early exercise, you need to wait until the option vests until you exercise the option. Every time an additional portion of the option vests you can exercise that portion if that is what you want to do.

Exercise of the vested portion, or early exercise of the nonvested portion, may or may not be to your advantage. There is a potential tax savings in doing so if the stock value rises, but exercising the option requires you to pay for the shares you face the possibility that this money will be tied up for a long time or possibly lost if the company ultimately fails.

Kaye Thomas
Fairmark.com

Re: 83(b) for ISO
Posted by: anshu0203, February 2, 2015 12:43AM
Thank-you Kaye.

I'm not able to understand every word of your answer but it did cleared lots of question.

I'll read more about AMT and other stuff and will post any of my further concerns.

Thanks
Anshu

Re: 83(b) for ISO
Posted by: anshu0203, February 24, 2015 09:08PM
Further questions:

1) I'm planning to exercise some of my stocks and market price and exercise price of my ISO are same. This means i have no liability for AMT this year? Am i correct?

2) if say, market price of the stock increases after i exercise my options - how the tax calculation will be done?

Thanks for helping me out
Anshu

Re: 83(b) for ISO
Posted by: Kaye Thomas, February 27, 2015 08:28PM
If the fair market value is the same as the exercise price, there is no AMT when you exercise the option. To avoid AMT when the stock vests, it's important to file the 83b election when you exercise the option, as mentioned earlier. If you file this election, you will not owe tax until you sell the shares.

Kaye Thomas
Fairmark.com

Re: 83(b) for ISO
Posted by: MaryL2016, March 31, 2016 06:25PM
Kaye,

Is there an IRS rule that dictates the 83b form must be the original form and have actual signature of employee? I'm to see if its possible to make this form electronic and have them sign it electronically. I've received Legal guidance that I must have the participant sign it and send in the original signed copy.

Thanks!

Re: 83(b) for ISO
Posted by: Kaye Thomas, March 31, 2016 06:59PM
I can't give a definitive answer, but the legal guidance you received sounds right to me. Note that this is not an IRS form. I've never heard of electronic signatures being acceptable except on IRS forms. I believe you have to send in an original signed copy.

Kaye Thomas
Fairmark.com

Re: 83(b) for ISO
Posted by: MaryL2016, March 31, 2016 08:36PM
Thanks for lending your expertise Kaye!



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