What Is the 83(b) Election?

The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting.

Understanding the 83(b) Election

The 83(b) election applies to equity that is subject to vesting, and it alerts the Internal Revenue Service (IRS) to tax the elector for the ownership at the time of granting, rather than at the time of stock vesting.

The 83(b) election documents must be sent to the IRS within 30 days after the issuing of restricted shares. In addition to notifying the IRS of the election, the recipient of the equity must also submit a copy of the completed election form to their employer.

In effect, an 83(b) election means that you pre-pay your tax liability on a low valuation, assuming the equity value increases in the following years. However, if the value of the company instead declines consistently and continuously, this tax strategy would ultimately mean that you overpaid in taxes by pre-paying on higher equity valuation.

Typically, when a founder or employee receives compensation of equity in a company, the stake is subject to income tax according to its value. The fair market value of the equity at the time of the granting or transfer is the basis for the assessment of tax liability. The tax due must be paid in the actual year the stock is issued or transferred.

However, in many cases, the individual receives equity vesting over several years. Employees may earn company shares as they remain employed over time. In which case, the tax on the equity value is due at the time of vesting. If the company’s value grows over the vesting period, the tax paid during each vested year will also rise in accordance.

Example of an 83(b) Election

For example, a co-founder of a company is granted 1 million shares subject to vesting and valued at $0.001 at the time the shares are granted. At this time, the shares are worth the par value of $0.001 x number of shares, or $1,000, which the co-founder pays. The shares represent a 10% ownership of the firm for the co-founder and will be vested over a period of five years, which means that they will receive 200,000 shares every year for five years. In each of the five vested years, they will have to pay tax on the fair market value of the 200,000 shares vested. 

If the total value of the company’s equity increases to $100,000, then the co-founder’s 10% value increases to $10,000 from $1,000. The co-founder’s tax liability for year 1 will be deduced from ($10,000 – $1,000) x 20% i.e. in effect, ($100,000 – $10,000) x 10% x 20% = $1,800.

• $100,000 is the Year 1 value of the firm
• $10,000 is the value of the firm at inception or the book value
• 10% is the ownership stake of the co-founder
• 20% represents the 5-year vesting period for the co-founder’s 1 million shares (200,000 shares/1 million shares)

If, in year 2, the stock value increases further to $500,000, then the co-founder’s taxes will be ($500,000 – $10,000) x 10% x 20% = $9,800. By year 3, the value goes up to $1 million and the tax liability will be assessed from ($1 million – $10,000) x 10% x 20% = $19,800. Of course, if the total value of equity keeps climbing in Year 4 and Year 5, the co-founder’s additional taxable income will also increase for each of the years.

If at a later time, all the shares sell for a profit, the co-founder will be subject to a capital gains tax on his gain from the proceeds of the sale.

83(b) Election Tax Strategy

The 83(b) election gives the co-founder the option to pay taxes on the equity upfront before the vesting period starts. This tax strategy will only require that tax be paid on the book value of $1,000. The 83(b) election notifies the IRS that the elector has opted to report the difference between the amount paid for the stock and the fair market value of the stock as taxable income. The share value during the 5-year vesting period will not matter as the co-founder won’t pay any additional tax and gets to retain the vested shares. However, if the shares for sold for a profit, a capital gains tax will be applied. 

Following our example above, if the co-founder makes an 83(b) election to pay tax on the value of the stock upon issuance, the tax assessment will be made on $1,000 only. If the stock is sold after, say, ten years for $250,000, the taxable capital gain will be on $249,000 ($250,000 – $1,000 = $249,000).

The 83(b) election makes the most sense when the elector is sure that the value of the shares is going to increase over the coming years. Also, if the amount of income reported is small at the time of granting, an 83(b) election might be beneficial.

In a reverse scenario where the 83(b) election was triggered, and the equity value falls or the company files for bankruptcy, then the taxpayer overpaid in taxes for shares with a lesser or worthless amount. Unfortunately, the IRS does not allow an overpayment claim of taxes under the 83(b) election. For example, consider an employee whose total tax liability upfront after filing for an 83(b) election is $50,000. Since the vested stock proceeds to decline over a 4-year vesting period, they would have been better off without the 83(b) election, paying an annual tax on the reduced value of the vested equity for each of the four years, assuming the decline is significant.

Another instance where an 83(b) election would turn out to be a disadvantage will be if the employee leaves the firm before the vesting period is over. In this case, they would have paid taxes on shares that would never be received. Also, if the amount of reported income is substantial at the time of stock granting, filing for an 83(b) election will not make much sense.

What Are Articles of Incorporation?

Articles of incorporation are a set of formal documents filed with a government body to legally document the creation of a corporation. Articles of incorporation generally contain pertinent information such as the firm’s name, street address, agent for service of process, and the amount and type of stock to be issued. The articles of incorporation are used to legally form the corporation.

Understanding Articles of Incorporation

Many businesses in the U.S. and Canada are formed as a corporation, which is a type of business operation that is formed in the state where the company carries out its operations. To be recognized legally as a corporation, a business must incorporate by taking certain steps and making certain decisions required under corporate law. One such step is filing a document known as articles of incorporation.

Articles of incorporation are in the document necessary to register a corporation with a state and acts as a charter to recognize the establishment of a corporation. The document outlines the basic information needed to form a corporation, the governance of a corporation, and the corporate statutes in the state where the articles of incorporation are filed.

Where to File Articles of Incorporation

In the U.S., articles of incorporation are filed with the Office of the Secretary of State in the state where the business chooses to incorporate. Some states offer more favorable regulatory and tax environments and, as a result, attract a greater proportion of firms seeking incorporation.

For example, Delaware and Nevada attract about half of the public corporations in the U.S., in part because of the state laws that protect their corporations. Once established, the articles become a public record and provide important information about the corporation.

Many states charge filing fees for a business that incorporates in the state, whether the business operates there or not. A business that is incorporated in one state and is physically located or doing business in another state must register in the other state as well, which involves paying that state’s filing fees and taxes.

Depending on the state of incorporation, a company may pay filing fees ranging from $50 (as in Iowa, Arkansas, and Michigan) to $275 (as in Massachusetts) as of 2020. The fees can vary depending on whether the articles of incorporation were filed online or by mail.

Articles of Incorporation Document Requirements

The articles in the document vary by state, but the following items (i.e. “articles” are typically included:

1. Name of corporation
2. Name and address of the registered agent
3. Type of corporate structure (e.g., profit corporation, nonprofit corporation, non-stock corporation, professional corporation, etc.)
4. Names and addresses of the initial board of directors
5. Number and type of authorized shares
6. Duration of the corporation, if it wasn’t established to exist perpetually
7. Name, signature, and address of the incorporator, who is the person in charge of setting up a corporation

Most states also require the articles to state the firm’s purpose, though the corporation may define its purpose very broadly to maintain flexibility in its operations. Amazon’s certificate of incorporation, for example, states that the corporation’s purpose is “to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.”

Other provisions outlined in a company’s articles of incorporation may include the limitation of the directors’ liability, actions by stockholders without a meeting, and the authority to call special meetings of stockholders. Each state has certain mandatory provisions that must be contained in the articles of incorporation and other optional provisions that the company can decide whether to include.

Articles of Incorporation vs. Other Documents

Articles of Incorporation vs. Bylaws

While the articles of incorporation are externally-filed formation documents, bylaws are more of use to a company when used internally. Bylaws set the internal processes and organization of how the company should be run. Bylaws outline the rules and procedures for the management of a company. Not all states require a company to maintain bylaws, though many require a company to formally memorialize the bylaws.

Articles of Incorporation vs. LLC Operating Agreement

Articles of incorporation are required state filings to form a corporation, while LLC operating agreements are used exclusively for LLCs. In addition, the articles of incorporation outline the information structure of the company. Meanwhile, operating agreements often outline how internal disputes will be resolved between members or owners. An LLC operating agreement acts more of a personal protection document than the articles of incorporation.

Articles of Incorporation vs. Business License

A business license often permits a company to operate within a specific jurisdiction or industry. It gives the holder the right to start and run a business in the designed geographical location that issues the license. The rights granted by a business license are often more specific and niche than the articles of incorporation; though similar information may be required for both, the articles of incorporation simply legally form an organization and is the highest governing document for a corporation.

Articles of Incorporation vs. Business Plan

A business plan is an internal document that may be shared with major customers, investors, or lending institutions that communicates the formal operating plan of a company. Often a strategic document, a business plan is mainly used by internal management as a roadmap for decision-making. This is in stark contrast of the articles of incorporation which are information-only, non-strategic requirements for legal reasons.

Importance of Articles of Incorporation

A corporation should take care when filings its articles of incorporation as these formation documents carry great significance. For starters, they are legally required to structure a new business or company. The corporation can not form and be recognized by the state as a legal business entity until the forms are registered.

Once a business is incorporated, it often has a greater ability to raise capital via stock issuances. A corporation cannot sell stock until is incorporated via the filing of its articles of incorporation. Corporations may also receive more favorable tax treatment compared to individual or personal tax rates.

In addition, there are personal liability considerations for companies being formed. Individuals are often held liable for a company’s obligations until it is incorporated. By forming a legal corporation, business owners may be shielded from some personal liability for the company’s debts. This liability protection cannot occur until the articles of incorporation have been filed.

Example of Articles of Incorporation

The image below captures the first few requirements from the Secretary of State form required by the state of Washington. This form is to be completed and returned to the government agency for review.

Some sections simply require a check mark for applicability or a ‘yes/no’ mutually exclusive selection. Other areas (such as the purpose of the corporation) require written response. As designated by the top of the form, this specific article of incorporation document template is for specific use for the formation of non-profit corporations.

The Washington State Articles of Incorporation form ends with the certification section in which an incorporator must certify the information given is correct to the best of their knowledge. The incorporator is also required to provide some personal information along with their signature.

The form above had been filed by Parrot Foundation, a Washington nonprofit organization. A snipped of Parrot Foundation’s articles of incorporation has been provided below as an example of the dates, structure, and business purpose a company may request when filing its articles of incorporation.

The Bottom Line

If a company wants to become a corporation, it must file articles of incorporation with its appropriate state agency. This formation document is required as part of the incorporation process, and the articles provide the state a variety of information about the company and its incorporators. Different from other legal documents that outline how a company will operate internally, the article of incorporation is intended to help external parties evaluate and form a corporation.

What Is Adjusted Gross Income (AGI)?

Adjusted gross income (AGI) is the figure that the Internal Revenue Service (IRS) uses to determine your income tax liability for the year. It is calculated by subtracting certain adjustments from gross income, such as business expenses, student loan interest payments, and other expenses. After calculating a taxpayer’s AGI, the next step is to subtract deductions to determine their taxable income.

The IRS also uses other income metrics, such as modified AGI (MAGI), for specific programs and retirement accounts.

Understanding Adjusted Gross Income (AGI)

As prescribed in the United States tax code, AGI is a modification of gross income. Gross income is simply the sum of all the money you earned in a year, which may include wages, dividends, capital gains, interest income, royalties, rental income, alimony, and retirement distributions, before tax or other deductions. AGI makes certain adjustments to your gross income to reach the figure on which your tax liability will be calculated.

Many U.S. states also use the AGI from federal returns to calculate how much individuals owe in state income taxes. States may modify this number further with state-specific deductions and credits.

Common Adjustments

The items subtracted from your gross income to calculate your AGI are referred to as adjustments to income, and you report them on Schedule 1 of your tax return when you file your annual tax return. Some of the most common adjustments are listed here, along with the separate tax forms on which a few of them are calculated:

• Alimony payments (for divorces filed before Jan. 1, 2019)
• Early withdrawal penalties on savings
• Educator expenses
• Employee business expenses for armed forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses (Form 2106)
• Health Savings Account (HSA) deductions (Form 8889)
• Moving expenses for members of the armed forces (Form 3903)
• Self-employed Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), and qualified plans
• Self-employed health insurance deduction
• Self-employment tax (the deductible portion)
• Student loan interest deduction

How to Calculate Adjusted Gross Income

If you use software to prepare your tax return, it will calculate your AGI once you input your numbers. If you calculate it yourself, you’ll begin by tallying your reported income for the year. That might include job income, as reported to the IRS by your employer on a W-2 form, plus other income, such as dividends and miscellaneous income, reported on 1099 forms.

Next, you add any taxable income from other sources, such as profit on the sale of a property, unemployment compensation, pensions, Social Security payments, or anything else that hasn’t already been reported to the IRS. Many of these income items are also listed on IRS Schedule 1.

The next step is to subtract the applicable adjustments to the income listed above from your reported income. The resulting figure is your AGI. To determine your taxable income, subtract either the standard deduction or your total itemized deductions from your AGI. In most cases, you can choose whichever gives you the most benefit.

For example, the standard deduction for tax returns for married couples filing jointly was $25,900 in 2022, rising to $27,700 in 2023, so couples whose itemized deductions exceed that amount would generally opt to itemize, while others would take the standard deduction.

The IRS provides a list of itemized deductions and the requirements for claiming them on its website. Your AGI also affects your eligibility for many of the deductions and credits available on your tax return. In general, the lower your AGI, the more significant the number of deductions and credits you will be eligible to claim, and the more you’ll be able to reduce your tax bill.

An Example of AGI Affecting Deductions

Let’s say you had some significant dental expenses during the year that weren’t reimbursed by insurance, and you’ve decided to itemize your deductions. You are allowed to deduct the portion of those expenses that exceed 7.5% of your AGI.

This means that if you report $12,000 in unreimbursed dental expenses and have an AGI of $100,000, you can deduct the amount that exceeds $7,500, which is $4,500. However, if your AGI is $50,000, the 7.5% reduction is just $3,750, and you’d be entitled to deduct a larger amount of that $12,000, in this case $8,250.

Adjusted Gross Income (AGI) vs. Modified Adjusted Gross Income (MAGI)

In addition to AGI, some tax calculations and government programs call for using what’s known as your modified adjusted gross income, or MAGI. This figure starts with your AGI, then adds back certain items, such as any deductions you take for student loan interest or tuition and fees.

Your MAGI is used to determine how much, if anything, you can contribute to a Roth individual retirement account (Roth IRA) in any given year. It is also used to calculate your income if you apply for Marketplace health insurance under the Affordable Care Act (ACA).

Many people with relatively uncomplicated financial lives find that their AGI and MAGI are the same number or very close.

Adjusted Gross Income vs. Gross Income vs. Taxable Income

Your gross income is all of the money you’ve earned in a year that isn’t exempt from taxation. This can be in the form of salary, wages, interest, dividends, capital gains, and so on.

Your adjusted gross income takes that amount and takes out certain qualified expenses and adjustments.

Taxpayers can then take either the standard deduction for their filing status or itemize the deductible expenses they paid during the year. You’re not permitted to both itemize deductions and claim the standard deduction. The result is your taxable income.

Frequently Asked Questions

The Bottom Line

Adjusted gross income, or AGI, is your gross income after it has been adjusted for certain qualified deductions that are permitted by the Internal Revenue Service (IRS). These qualified deductions reduce an individual’s gross income, thus reducing the taxable income that they will ultimately have to pay taxes on. You can save money come tax season by lowering your AGI, which will lower your taxable income, in turn. However, many of the adjustments allowed for AGI are specific for particular circumstances that may not apply to everyone.

What Is an Amended Return?

An amended return is a form filed in order to make corrections to a tax return from a previous year. An amended return can correct errors and claim a more advantageous tax status, such as a refund. For example, one might choose to file an amended return in instances of misreported earnings or tax credits. Mathematical errors, however, do not require amendments because the IRS automatically corrects for such errors when processing the tax return.

Who Should File an Amended Return?

All taxpayers are required to file their taxes annually for the previous tax year. Taxpayers may realize that they made a mistake in filling out their tax forms, or their circumstances may have changed after they have submitted or mailed a return that has been accepted by the government. If this occurs, the Internal Revenue Service (IRS) has provided a way for these individuals to redo their taxes by providing an amended return form, Form 1040-X, on the IRS website.

Not all errors need amending by the form. The IRS will spot and correct a mathematical error, for example, when the initial tax return is sent in for processing. When this happens, any refund owed will be adjusted and any extra tax liability due will be billed to the taxpayer. In the event that the individual fails to include a required form or schedule in their submitted original tax return, the IRS will send a letter requesting that they mail the missing information to one of their offices.

When to File an Amended Return

A taxpayer must file an amended return if:

• The taxpayer’s filing status for the tax year changed or was incorrectly entered. For example, if an individual filed as single but actually got married on the last day of the tax year, they will need to amend their return by filing their taxes under the appropriate status—married filing jointly (MFJ) or married filing separately (MFS).
• The number of dependents claimed is inaccurate. An amended return will be necessary if a taxpayer needs to claim additional dependents or remove dependents that were previously claimed. For example, a couple may have included a baby born in January before taxes were filed in April on the prior year’s tax return. That baby cannot be included on the previous year’s tax return because they were not born before the end of the year.
• Tax credits and deductions were claimed incorrectly or were not claimed. In the latter case, the taxpayer may have realized that they qualified for a credit or deduction and may want to file an amended return to reflect this.
• The income reported for the tax year was incorrect. If a taxpayer receives additional tax documents for the tax year (say a Form 1099 or a K-1 arrives in the mail after the tax deadline), they may file an amended tax return to report the additional income.
• Deductibility of certain expenses change as a result of legislation changes. Sometimes, legislation will come through after a taxpayer has filed a return that affects the deductibility of certain expenses. For example, the deduction for private mortgage insurance (PMI) originally expired on Dec. 31, 2017, due to the Tax Cuts and Jobs Act of 2017. The Consolidated Appropriations Act, signed into law in December 2019, extended the deduction through Dec. 31, 2020. This made the deduction available for the 2019 and 2020 tax years and retroactive for the 2018 tax year.
• Tax relief due to a natural disaster changes the taxpayer’s tax liability. This is a common issue for taxpayers who have been affected by a natural disaster, especially one in the later part of the tax year. The government frequently offers tax relief for those affected by natural disasters, but legislation may take longer to finalize than the typical tax season window allows. Taxpayers should pay their full tax liability as it sits when the tax return is due. If legislation changes, an amended return can be filed to reclaim any refund owed to them due to natural disaster tax relief.
• The taxpayer realizes that they owe more taxes than they actually paid. To avoid getting hit with a penalty from the government, they can file an amended return with the IRS.

How to Amend a Tax Return

Form 1040-X has three columns: A, B, and C. Under column A, the figure that was reported in the original or last-amended tax form is recorded. The taxpayer will need to input the adjusted or correct number in column C. The difference between columns A and C is reflected in column B. The adjustments made to a tax return will either result in a tax refund, balance due, or no tax change. The taxpayer also has to explain what changes they are making and the reasons for making each change in a section provided on the back of Form 1040-X.

Disadvantages of an Amended Tax Return

The drawback of filing an amended tax return is that Form 1040-X cannot be submitted electronically for every tax year, although the IRS has recently started accepting e-filed amended returns for tax year 2019. If filling out the form manually, the taxpayer has to mail the printed-out document to the IRS Service Center that processed the original tax form. The IRS manually processes amended returns, and the process can take 16 weeks—or even longer, if the amended return is not signed, is incomplete, has errors, requires additional information, needs clearance by the IRS bankruptcy department, has been routed to another specialized area, or has been affected by identity fraud.

There is, however, a three-year statute of limitations for issuing tax refund checks. Therefore, the taxpayer must file any amended returns that will result in a tax refund within three years after the date they filed the original tax return. An amended return filed to account for additional income or overstated deductions does not fall under any such statute and can be filed at any time.

Download Amended Tax Return Form Here

All current and prior revisions of the IRS Form 1040-X are available on the IRS website here.