As has been discussed at the Tax Forum in various factual scenarios, when property subject to a substantial risk of forfeiture (i.e., “unvested”) is transferred to a service provider in connection with the performance of services, the service provider may elect, under §83(b), to include in gross income the property’s then fair market value over the amount, if any, paid for the property. If the service provider does not make a timely election under §83(b), the property is taxable when it becomes substantially vested at its value at that time and, just as important, the service provider is not considered to be the “tax owner” of the property until that time.

However, note that if the unvested property is a profits interest qualifying as such under Rev. Procs. 93-27 and 2001-43, the IRS has stated that a §83(b) election need not be made, a “gift” that, as discussed at the Tax Forum, is often ignored and a protective §83(b) election is made just in case the profits interest does not so qualify.

Failure to make a §83(b) election where one is required to avoid the potential adverse consequences discussed above could be costly if the value of the property increases significantly from the date of its transfer to the service provider to the date of becoming substantially vested, resulting in the service provider paying a much higher tax bill. In addition, not being considered to be the tax owner of S corporation stock could produce ordinary income (e.g., a bonus) rather than capital gain, if the S corporation sells its assets (such as goodwill) before the stock vests. Consequently, making a timely filed §83(b) election (i.e., within 30 days after the interest is transferred to the service provider) is very often essential.

In this respect, on November 7, 2024, the IRS issued Form 15620, Section 83(b) Election, to provide taxpayers with a form that will comply with the requirements of a §83(b) election and instructions providing guidance of how to make the election properly. Until recently, Form 15620 (or a statement pursuant to Reg. §1.83-2(e)) had to be mailed to the IRS office where the service provider files his/her federal income tax return. Now, the service provider has another option to file Form 15620 utilizing ID.me, which offers access to IRS online services, and can be located at the IRS website, www.irs.gov. After logging into the service provider’s ID.me account (or creating an ID.me account if an account is not already active), the service provider will answer a series of questions to complete Form 15620 and can submit the form electronically (the method preferred by IRS) or download and mail a copy of the form to the appropriate IRS office.

Utilizing the electronic option does not relieve the service provider of the requirements to file the election within the strict 30-day period required by statute, provide a copy of the election to the issuing company, and retain a copy of the election for his/her records. Upon filing Form 15620 electronically, the service provider will receive a confirmation and the filed form can be downloaded or printed so that the service provider can be assured that his essential task has been completed.

As always, we look forward to connecting with you virtually or in person at one of our fall or winter Tax Planning Forum® and Fundamentals of Flow-Through® programs. Registration for all programs is open — secure your spot today.