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IRS addresses when compensation income is recognized
The IRS has provided sample language that employees and independent contractors may use to elect to recognize compensation income on stock or other property received for the performance of services under Section 83(b) of the Internal Revenue Code.
The election is available if the service provider’s (employee or independent contractor’s) rights to the property are subject to a substantial risk of forfeiture and the property is not transferable. In the absence of an election, the value of the property is determined when the restrictions lapse and the service provider recognizes income in the year they lapse. The election cannot be made for receipt of an option unless the option has a readily ascertainable fair market value.
If an election is made, the excess of the value of the property – ignoring restrictions that will lapse – over any amount paid by the service provider is income in the year the property is received. The basis of the property is increased by the amount of income. No amount is taxable when the property becomes substantially vested.
On a subsequent sale of the property, the service provider recognizes gain or loss. If the property is forfeited after making an election, no deduction is available for the amount previously included in income. However, the service provider can claim a loss equal to the amount, if any, paid for the property over the amount, if any, realized on the forfeiture.
To make a valid election, the service provider must file the election statement with the IRS within 30 days of the transfer of the property. The election cannot be revoked without IRS consent. According to Revenue Procedure 2012-29, the election must include all of the following:
The taxpayer’s name, address and taxpayer identification number
A description of the property being transferred
The date(s) the property was transferred and the taxable year of the election
The nature of the restrictions on the property
The property’s fair market value at the time of transfer
The amount paid for the property
The amount of compensation income
A statement that copies have been furnished to the required persons
A copy of the election must be provided to the employer, and another copy must be attached to the service provider’s income tax return.
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The technical information here is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.
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