83(b) Election for Texas Residents: Margin-Tax Timing

Introduction

Texas residents receiving restricted stock or equity grants often overlook the timing implications of an 83(b) election on both federal income tax and Texas franchise tax, potentially leading to unexpected liabilities or missed savings. Inexperienced advisors may fail to coordinate the election with Texas’s margin-tax rules, resulting in inefficient tax outcomes for startups and employees.

Are you timing your 83(b) election to minimize federal and Texas franchise tax impacts in 2025? At Kewal Krishan & Co, our expert tax advisors help Texas clients save an average of $50,000 annually, potentially totaling $775,000 over a decade through precise equity compensation planning. This blog explains the 83(b) election for Texas residents under Internal Revenue Code (IRC) § 83(b), focusing on margin-tax timing under Texas Tax Code § 171, with detailed examples and compliance steps for 2025.

With Texas’s no-state-income-tax environment and the One Big Beautiful Bill Act (OBBBA) enhancing federal incentives, proper timing can optimize vesting-related taxes. Begin aligning your election strategy today with insights from Our Tax Planning Services.

Understanding the 83(b) Election and Margin-Tax Timing in Texas

The 83(b) election under IRC § 83(b) allows recipients of restricted property (e.g., stock subject to vesting) to include the fair market value (FMV) minus amount paid in gross income at grant, rather than at vesting when FMV may be higher. This shifts taxation to the grant date, converting future appreciation to capital gains (IRC § 1001).

For Texas residents, the election affects federal income tax and potentially Texas franchise tax if the recipient owns a Texas entity. Texas franchise tax is on taxable margin (Texas Tax Code § 171.101), and an 83(b) election accelerates income recognition, which may impact margin calculations for pass-through entities.

Key Considerations

• Federal Benefits: Tax at ordinary rates on low FMV at grant (up to 37% in 2025), with future gains at long-term capital rates (0-20% + 3.8% NIIT under IRC § 1(h), § 1411).
• Texas Margin-Tax Impact: Income from the election may be included in total revenue for franchise tax if the business is subject to it (0.75% rate, Texas Tax Code § 171.002). Timing the election to vest in low-revenue years minimizes impact.
• Risks: If stock value declines or is forfeited, no refund on tax paid (IRC § 83(b)); irrevocable without IRS consent.
• OBBBA Enhancements: No direct change, but permanent QBI (IRC § 199A) may interact with election income for pass-throughs.

File the election with IRS within 30 days of grant (new Form 15620 in 2025); copy to employer and personal return. For details, see IRS Publication 525 and Texas Comptroller’s Franchise Tax Guide.

Detailed Example: Timing the 83(b) Election for Margin-Tax Savings

Consider a Texas startup founder receiving 10,000 restricted shares on January 1, 2025, FMV $1/share ($10,000 total), vesting over four years. The founder owns a Texas LLC with $500,000 revenue.

• No Election: Income recognized at vesting: $2,500/year if FMV rises to $4/share by year 4. Federal tax at ordinary rates each year. Texas margin includes prorated income, increasing franchise tax by ~$14/year (70% margin, 0.75% rate).
• 83(b) Election: Reports $10,000 income in 2025 at 32% ($3,200 tax) + 3.8% NIIT ($380) = $3,580. Future appreciation capital gains. Texas margin includes $10,000 in 2025 revenue, adding $52.50 franchise tax (70% × $10,000 × 0.75%).
• Timing Savings: Election in low-revenue year (e.g., startup phase $200,000 revenue) minimizes margin impact to $21 (vs. $52.50 in high-revenue year). Federal QBI on $10,000 ($2,000 deduction, saving $640 at 32%).

Net: Election saves ~$1,500 federal tax over vesting if FMV rises, with minimal Texas increase if timed early.

Alternative Scenario

For forfeited stock post-election: Pay $3,580 tax with no refund (IRC § 83(b)); no election avoids this but defers tax risk.

Step-by-Step Guide for Taxpayer Compliance

To make and time an 83(b) election for optimal federal and Texas margin-tax outcomes in 2025, follow these steps:

1. Receive Grant: Document grant date, FMV, and vesting schedule; obtain valuation if needed (IRC § 83).
2. Assess Timing: Evaluate current vs. future revenue for margin impact (Texas Tax Code § 171.101); elect in low-revenue year.
3. Prepare Election: Complete Form 15620 with FMV details; sign and file with IRS within 30 days of grant.
4. Provide Copies: Send to employer (for W-2) and retain for personal return (Form 1040).
5. Report Federal Income: Include on Form 1040, Schedule 1; pay tax with estimates (Form 1040-ES).
6. Calculate Texas Margin: Include election income in LLC revenue if applicable; file Form 05-163/05-169 by May 15, 2026 (Texas Tax Code § 171.002).
7. Claim QBI if Eligible: Deduct 20% on election income if qualified business (IRC § 199A).
8. Retain Records: Keep election form, valuation, and filings for three years (IRC § 6001).

For equity in Texas entities, explore Our Business Tax Services.

Common Pitfalls to Avoid

• Missing 30-Day Deadline: Election invalid, taxing at vesting (IRC § 83(b)).
• Undervaluing FMV: IRS revaluation increases tax/penalties (IRC § 6662).
• Margin Miscalculation: Exclude election income from Texas revenue risks underreporting (Texas Tax Code § 171.101).
• No Employer Copy: Delays W-2 reporting, complicating compliance.

Why Work with a Tax Expert?

Timing an 83(b) election for Texas residents involves balancing federal IRC § 83(b) with Texas franchise tax under Texas Tax Code § 171, where pitfalls like missed deadlines or misvaluations can lead to audits or overpayments. Generic advisors may neglect margin impact or OBBBA’s QBI interactions, costing thousands. Kewal Krishan & Co specializes in Texas equity tax strategies, ensuring timely elections and optimal timing for savings. Our expertise resolves complexities, as demonstrated in Our Tax Litigation Services.

Conclusion

The 83(b) election offers Texas residents a powerful tool to minimize federal tax on equity grants in 2025, with careful timing reducing Texas margin-tax impact in a no-income-tax state. Proper valuation, filing, and revenue assessment are essential—consult professionals now to align your election with overall tax efficiency.

Call to Action

Schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed U.S. CPA and Enrolled Agent, admitted to practice before the IRS, specializing in tax litigation and cross-border tax for U.S. businesses and Indians in the U.S. Contact us at Kewal Krishan & Co to time your 83(b) election.

About Our CPA

Anshul Goyal, CPA EA FCA, is a licensed U.S. CPA and Enrolled Agent, representing clients in IRS tax litigation and assisting with cross-border tax compliance for U.S. businesses and Indians in the U.S. His expertise ensures tailored strategies that maximize savings and ensure compliance.

Disclaimer

This blog provides general information for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions. The author and firm disclaim liability for actions taken based on this content.

FAQs

1. What is an 83(b) election?

Taxes restricted stock at grant FMV, not vesting (IRC § 83(b)).

2. How does it affect Texas margin tax?

Accelerates income recognition, potentially increasing taxable margin (Texas Tax Code § 171.101).

3. What’s the filing deadline?

30 days from grant, using Form 15620.

4. Can it be revoked?

No, without IRS consent (IRC § 83(b)).

5. How to time for savings?

Elect in low-revenue years to minimize franchise tax impact.