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IRS releases final regulations on Section 83(b) elections

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Tax Hot Topics: Section 83(b) final regsThe IRS released final regulations (T.D. 9779) eliminating the requirement for an individual to attach a Section 83(b) election to his or her individual income tax return for the year the election is made. Section 83(b) allows a service provider to elect to include the fair market value of property transferred in connection with the performance of services, less the amount paid for the property (if any), in income on the date the property is transferred (for example, the grant date) even though the property is subject to a substantial risk of forfeiture.

To make a valid Section 83(b) election, the service provider is required to file an election statement with the IRS within 30 days after the date the property is transferred to him or her and provide a copy of the election to the employer that transferred the property. Under the prior regulations, the service provider was also required to attach a copy of the election to his or her federal income tax return for the year the election is made.  

According to the IRS, this change was made to address concerns regarding taxpayers’ ability to e-file their tax returns and attach the Section 83(b) election to the returns. The new regulations apply to property transferred on or after Jan. 1, 2016, but taxpayers may rely on these regulations for property transferred on or after Jan. 1, 2015.  

In the preamble to these regulations, the IRS reminded taxpayers of their responsibility to retain records to show the amount paid for the property and to support the tax treatment of the property transfer reported on the taxpayers’ returns. This includes support for the fair market value reported on the Section 83(b) election, which is used to determine the compensation recognized by the taxpayer in the year the election is made. This documentation should be retained until the statute of limitations expires.

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