Facts: I have a client that wants to admit it's key employee as an equity owner of the company. The owner wants to give the employee company stock as a bonus. I believe that the bonus is part of wages and the employee's basis in the stock is the value of his bonus.

My question: what needs to be filed in order for the above to take effect? Does an 83(b) election need to be made? Or just simply document the payroll and bonus and include it in the W-2? My question is mainly procedural.

Section 83b stock requires a filing on a tax return to make the election. The value of the stock is included on the employee's W-2 if the employee makes an election to exercise the option to value the stock now rather than later. For the employee, the employee doesnt have to report the restricted stock as income when he receives restricted stock from an employer. That's the good news.

The bad news is that the employee has to report income when the stock vests, even if the employee doesnt sell it at that time. What's worse, the income the employee reports includes any increase in the value of the stock during the vesting period. You have to report the full value as compensation income, not capital gain.

Ok, that all makes sense. How you apply for the election? Is the election irrevocable?

The election is on the employee's side. If stock options vest over a period of time, and the employee thinks that the value of the options will appreciate over time, then the employee can make an election to include the entire value of the stock options in his/her income when he receives the options and not when they vest.

Making an 83b election is really an election to predict the future. I tell my clients that they are just rolling the dice as no one know what the world will look like when you go to cashing in the options.