Academic journal article Journal of Accountancy

Restricted Property and Section 83(b) Elections

Academic journal article Journal of Accountancy

Restricted Property and Section 83(b) Elections

Article excerpt

Employers are continually looking for new ways to reward and keep valued employees. Often this will take the form of stock or some other non-monetary compensation in return for employee services.


A popular compensation method is the restricted stock plan, which involves the transfer of stock that, when received, is subject to certain restrictions affecting its value. This type of plan has two goals: It allows the employee to defer tax on the property until the restriction lapses and gives him or her a stake in the employer's business.

Questions then arise about the tax treatment of such property, both as to when the income must be included in the employee's income and how much. (The amount that can be deducted by the employer also hinges on this determination.)

Generally, the employee is taxed for the restricted property's full value when ownership of the property is no longer subject to a substantial risk of forfeiture. Such a risk exists if the employee's right to full enjoyment of the property is conditioned on the future performance of substantial services by any individual (for example, required employment for a specified period of time from receipt of the property).

Section 83(b) election. Internal Revenue Code section 83(b) provides an exception to this general rule: An employee can elect to have the restricted property's value (over his cost) taxed to him in the year it is received, rather than when the restrictions have been lifted. To be timely, the election must be made within 30 days after the property is transferred and cannot be revoked without Internal Revenue Service consent.

Note: Section 83 applies to all property received in connection with the performance of services. Therefore, it applies to property for which full fair market value was paid; that is, the transfer was made solely to motivate the employee and the amount paid equaled its fair market value without regard to any restrictions. An employee who pays full fair market value (or close to it) for restricted property should seriously consider a section 83(b) election. Since the tax is paid when the property is originally transferred, no further tax on the property will be due, even if its value later increases significantly. …

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