83(b) Election - Tax Accounting for Early Exercised or Vesting Restricted Stock
Recording the tax and compensation accounting implications of an 83(b) election — where the founder or employee elects to include the spread between FMV and price paid as ordinary income NOW rather than as shares vest.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Compensation Expense - 83(b) Spread (If Any at Issuance) | Expense (+) | - | - |
| Common Stock / APIC (FMV of Shares Issued) | Equity (+) | - | - |
💡 Accountant's Note
The 83(b) election is one of the most critical decisions a startup founder makes — and it is purely a TAX election with no direct GAAP accounting impact if the spread at issuance is zero (or near zero). The GAAP mechanics: if a founder buys restricted stock (subject to vesting = a 'substantial risk of forfeiture') and makes NO 83(b) election, as each share vests the company must recognize compensation expense equal to the spread (FMV at vesting − price paid) × shares vesting. This could be enormous if the stock value has increased. With an 83(b) election filed within 30 days of issuance: the founder recognizes all income at issuance (typically zero if issued at FMV), and all future appreciation is capital gain. For GAAP: the company recognizes compensation expense equal to the FMV of shares at issuance minus price paid — at the time of issuance, not vesting.
Practitioner & Systems Framework
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If founder stock is issued at FMV (which should be par value at formation): 83(b) spread = $0 → no compensation expense. If issued slightly above zero but below FMV (which occasionally happens if issuance is delayed): small compensation expense = (FMV − price paid) × shares issued. For employees who early exercise unvested options (paying the exercise price before vesting): 83(b) election freezes the FMV at exercise date for tax purposes. No refund is available if the company fails — the most significant risk of the 83(b) election.
⚠️ Audit Flags
Auditors verify that 83(b) elections were actually filed (IRS confirmation copy maintained in company files) and that the timing (within 30 days) was met. Missing 83(b) elections create ongoing compensation expense as founder shares vest — potentially significant amounts if the stock price has risen dramatically. A Series A VC will often require founders to represent that all 83(b) elections were properly filed.
📄 Required Documentation
83(b) election form (signed copy + IRS file-stamped return receipt), stock purchase agreement, IRS acknowledgment letter, Board resolution establishing FMV at issuance, post-filing confirmation that no spread existed at issuance.
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