83(b) and Stock Options
Some companies that issue incentive and/or non-qualified stock options allow employees to exercise these options before they vest. If an employee does so and files an 83(b) election within 30 days of early exercise, then those unvested shares become subject to tax at the time of exercise. At that time, the bargain element, calculated as the difference between the strike price and the fair market value at the time of exercise, is counted as income for the purpose of calculating the AMT.
The reason this can be beneficial is that in a company that is doing well, share prices are generally expected to increase over time. This increase can be substantial, and so can the tax liability that accompanies it. As a result, choosing to report income and be taxed on it early has the potential to significantly reduce a shareholder’s total tax obligation.