Tax Reform: What it Means for Your Startup Equity (Part II)
It's tax season, friends! That's right, time to break out the W2's, 1099s, K-1s, and the rest of the alphabet soup that only your local accountant can decipher. Though EquityZen is proud to help shareholders get liquidity and investors into private companies, these events may have unique implications on your taxes. This is part two of a two-part series on the subject.
Last time, we posed the question: what exactly is an 83(i) election? Today, we're going to look at who can make an 83(i) election, as well as who can offer 83(i) elections, and how this affects startup employees, founders, and investors.
Who can offer section 83(i) elections?
- none of its stock is readily tradable on an established securities market; and
- the company has a written plan under which, in that calendar year either:
- 80% or more of its US employees receive stock option grants or
- 80% or more of its US employees receive RSUs; and
- the option grants or RSUs all have the same rights to receive qualified stock.
Who can make an 83(i) election?
- is the current or former CEO or CFO of the company
- owns (or has owned) one percent or more of the company’s stock at any time during the current calendar year or preceding 10 calendar years
- is the child, grandchild, spouse or parent of any employee described above; or
- is one of the four highest paid officers of the company for the tax year or for any of the preceding 10 tax years.
How does an 83(i) election compare with an 83(b) election?
When would you ever want to voluntarily pay taxes early? Particularly for founders and early startup employees, an 83(b) election can make sense, because the value (and thus, the amount of federal income tax due) at the time you purchase unvested shares may be very low. This can result in a low (or even zero) federal income tax bill if the exercise price of your options is at or close to fair market value. It can also help lower your federal income tax bill down the road if your shares continue to grow in value.
In sum, the new 83(i) elections let eligible employees defer federal income taxes for up to five years. 83(b) elections are still available to allow startup employees to accelerate their federal income taxes where that makes sense for their individual circumstances.
What about the AMT (Alternative Minimum Tax)?
- Differences in ISOs vs NSOs
- Five things to know about RSU
- Understanding your equity compensation
- Equity documents you should always have on file