Restricted stock is stock that’s granted subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk or you sell it. You then pay taxes on the stock’s fair market value at your ordinary-income rate.
But you can instead make a Section 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, can be beneficial if the stock is likely to appreciate significantly. Why? Because it allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.
There are some potential disadvantages, however:
- You must prepay tax in the current year — which also could push you into a higher income tax bracket or trigger or increase the additional 0.9% Medicare tax.
- Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or sell it at a decreased value.
If you’ve recently been awarded restricted stock or expect to be awarded such stock this year, contact us to determine whether the Sec. 83(b) election is appropriate for you.