Restricted Stock: Should You Pay Now Or Later?

For growing companies, equity-based compensation is a powerful tool for attracting and retaining executives and other key employees. If you receive an award of restricted stock or purchase shares subject to vesting, consider making an election under Internal Revenue Code Section 83(b) to accelerate taxable income associated with the stock.

Two Ways Section 83(b) Reduces Taxes

Accelerating income may seem illogical, but if the stock's growth prospects are strong and the risk of forfeiture is low, a Section 83(b) election can generate significant tax savings. Ordinarily, restricted stock is not subject to tax until it vests. However, you will be subject to tax at ordinary rates of the value on the stock's vesting date (less the purchase price you paid, if any). This can result in a substantial tax bill if the stock has appreciated significantly in value.