The Profit First method is a cash-management system created by Mike Michalowicz in his book Profit First. It flips the usual formula. Instead of Sales minus Expenses equals Profit, you take a predetermined percentage of every deposit as profit first, then owner’s pay and tax, and you run the company on what’s left. The mechanics are a set of bank accounts and a twice-a-month transfer rhythm, not a new way to keep your books.

You’ll also hear it called Profit First accounting or the Profit First cash system. Same idea. It is not GAAP, and it is not a tax method. The value is behavioral: if the operating account is smaller, you spend less. This is education, not tax or accounting advice. Talk to a CPA or bookkeeper before you change how you pay yourself or set aside money for taxes.

Sales minus profit equals expenses

Michalowicz’s argument, in the book and in his TEDx talk, is that the standard accounting formula leaves profit as a leftover, and leftover is where the trouble starts. He points to Parkinson’s Law: a resource expands to fill the space you give it. If the checking account looks fat, expenses rise to meet it. He borrows the “small plates” idea from portion control and the envelope system from personal finance, then applies both to the business bank account.

I buy the psychology. I’ve watched too many operators treat one operating account as a scoreboard, pay whatever bill is loudest, and then act shocked when April arrives empty. Taking profit first does not invent profit that isn’t there. It puts a fence around cash so you notice the shortfall while you can still cut spending, raise prices or change the work, instead of discovering it on a tax bill.

The five Profit First accounts

The method uses five accounts at whatever bank will let you open them. You do not need a special app or a branded bank to do this.

Income. Every customer payment lands here first. You don’t pay rent, payroll or software out of this account. It’s a holding tank until allocation day.

Profit. A set percentage of each allocation is moved here before you fund operations. This is meant to be a reward and a reserve, not a second checking account you raid whenever a bill feels tight.

Owner’s Pay (sometimes called Owner’s Comp). This is the account that funds what you take home for the work you do. It is not automatically the same thing as a W-2 wage, an owner’s draw or an S corporation distribution. Those labels have tax consequences. For the difference between a wage, a draw and a distribution, see how to pay yourself as a business owner.

Tax. A percentage of real revenue is set aside so quarterly estimates and year-end balances aren’t a scramble. Michalowicz’s published starting point is 15% of real revenue. His own site is clear that a tax professional may tell you 15% isn’t enough, because they are looking at profit on the P&L, not cash as it arrives. Don’t treat 15% as a guarantee. Your entity, your state and your personal situation change the bill.

Operating Expenses (OpEx). What’s left after the other transfers is the money you actually run the business on: rent, payroll, tools, contractors who aren’t being stripped out of real revenue, and the rest of the bills.

Some firms add a sixth account for materials, inventory or subcontractors. That’s useful if those costs are large and irregular. The point is the same: money gets a job before it can wander.

How the 10th and 25th split actually works

Michalowicz’s published rhythm, which he calls the 10/25 rule on his FAQ, is to let deposits collect in Income, then allocate twice a month, commonly on the 10th and the 25th. On those days you move money from Income into Profit, Owner’s Pay, Tax and OpEx using your percentages, and Income goes back toward zero. Bills get paid from OpEx. You pay yourself from Owner’s Pay. Tax money stays put until a due date.

For businesses under $250,000 in real revenue, a starting target allocation he publishes is 5% profit, 50% owner’s pay, 15% tax and 30% operating expenses. Those four numbers add up to 100% of real revenue, not of gross deposits if you have heavy materials or subcontractor costs. Here’s that split on a $10,000 allocation:

That table is a teaching example of his starting target, not a recommendation for your company. If 30% would bounce payroll next week, you do not jump there on Monday. Michalowicz distinguishes current allocation percentages (where you actually are) from target allocation percentages (where you’re aiming). You close the gap a point or two at a time, often quarterly, rather than blowing up cash flow to match a chart.

His Instant Assessment, included with the book, uses a grid that changes as real revenue grows. Owner’s pay as a share of revenue usually shrinks once you hire a team that does the work you used to do yourself, and the operating-expense share rises. Use his current assessment for the band you are in, not a blog’s copy of the table and not a percentage you borrowed from a friend in a different business.

Real revenue, and why the tax account still needs a CPA

Allocations are supposed to be a percentage of real revenue, which Michalowicz defines as total revenue minus materials and subcontractor costs. If you’re a consultant with almost no COGS, real revenue and top-line revenue are close. If you’re a contractor, an agency that white-labels work, or a shop that buys inventory, allocating against gross deposits will starve OpEx or overfund profit and tax. Subtract the pass-through costs first, then split what’s left.

The tax account is a cash reserve, not a filing strategy. It does not replace estimated-tax calculations, payroll withholding or a year-end projection. If you are self-employed and already sending money to the IRS four times a year, that reserve should fund quarterly estimated taxes for the self-employed, not get spent the first week a client pays late. A CPA or enrolled agent should set the percentage to your actual liability, then you use the account so the cash is there when the payment is due.

One more boundary, especially if you have an S corporation: Profit First’s “owner’s pay” and “profit” buckets are cash labels. They are not a workaround for reasonable compensation, payroll taxes or the way distributions are supposed to work. Get the cash habit and the tax treatment in the same conversation, not two separate fantasies.

When the Profit First method breaks

It breaks when the business has no spare cash to allocate. A pre-revenue company, or one that’s barely covering payroll, cannot pretend a 5% profit transfer is happening just because a book said so. In that stretch, a tiny profit percentage or a temporary pause is more honest than bouncing rent to look disciplined.

It also breaks on lumpy revenue. Project firms, seasonal shops and agencies with a few large invoices can look rich on the 10th and broke on the 25th. A twice-a-month split of the last two weeks’ deposits is a poor substitute for a longer cash view. Those businesses often need a materials or project account, and they need to plan around the slow months, not only the fat invoices.

Debt service and past-due taxes do not care about your profit account. If you owe back payroll tax or a loan payment, that cash already has a job. Parking it under a “profit” nickname doesn’t change the obligation.

The system also fails when you treat the profit account as a slush fund. If you transfer 5% in and pull 5% back out every time a bill feels uncomfortable, you built a more complicated checking account. The fence only works if it stays up most of the time.

Last, it breaks when you confuse five bank balances with a P&L. Cash can look healthy in the accounts while accrual profit is negative, or the opposite. You still need books, and you still need someone who can read them.

My honest verdict

I’d use the skeleton. Income as a holding tank, a tax account you don’t raid, a real owner’s-pay habit, and some profit taken first, even if it starts at 1%. The flipped formula is a useful constraint. It makes overspending visible while you can still do something about it.

I would not treat the published percentage grid as scripture. I would not replace a bookkeeper with five account nicknames. And I would not skip tax planning because a popular book made cash feel simpler than it is. The Profit First method works when you treat it as a behavior system with a human reviewing the numbers. It breaks when you treat it as magic.

FAQ: Profit First method

What is the Profit First method?

It’s Mike Michalowicz’s cash system: you allocate a set percentage of each deposit to profit, owner’s pay and tax first, then run the business on the remainder, usually through five bank accounts and a twice-a-month transfer rhythm.

How many bank accounts do you need for Profit First?

The standard setup is five: Income, Profit, Owner’s Pay, Tax and Operating Expenses. Some businesses add a materials, inventory or subcontractor account. Any bank that will open multiple accounts can be used.

What are the Profit First percentages?

They vary by real-revenue range. A starting target Michalowicz publishes for firms under $250,000 is 5% profit, 50% owner’s pay, 15% tax and 30% operating expenses. Start near your current reality and move toward the target gradually.

Does the Profit First method work for a new business?

The account structure can, but aggressive targets often can’t. If cash is tight, a very small profit percentage, or a short pause on the profit transfer, is more honest than bouncing bills to match a chart.

Is Profit First a tax strategy?

No. The tax account is a cash reserve so you can pay the bill. It does not change what you owe. A CPA should set the percentage to your actual liability and entity type.

What’s the difference between owner’s pay and profit in Profit First?

Owner’s pay is cash set aside for the work you do. Profit is a reserve and a reward taken off the top. Those are cash labels, not automatic tax categories like wages or distributions.

Pro forma financial statements are a projected income statement (P&L), balance sheet and cash flow statement, built from explicit assumptions about a period that has not happened yet. Harvard Business School Online, summarizing the school’s Financial Accounting course, calls them “financial statements forecasted for future periods” and a picture of what the books will look like “if the assumptions made when preparing them hold true.” Investors, lenders and buyers read all three statements, and they read the assumptions at least as hard as the totals.

You’ll also hear financial forecast, financial projection or a three-statement model. Same job, most of the time. In public-company filings, “pro forma” can also mean historical results recast for a transaction, which is a different exercise. This page is about the founder version: a forward package you can defend. It is education, not a valuation, a loan approval or accounting advice. A spreadsheet is enough. I’m not picking software for you.

The three statements have to tie

A P&L by itself is a hope with revenue on top. The balance sheet shows what you own and owe on a date, and it has to balance: assets equal liabilities plus equity. The cash flow statement explains why the bank account moved. Net income from the P&L should flow into retained earnings. Ending cash on the cash flow statement should match cash on the balance sheet. If those two links break, the package is not finished, no matter how pretty the growth rate looks.

That is also why the accounting basis matters. If you mix cash receipts with accrued invoices, the P&L and the cash flow will tell two different stories and you won’t know which one is the forecast. Stay consistent, and if you’re still mixing methods, start with cash vs accrual accounting before you build a year of projections on top of a muddled year of history.

The assumptions you should show, not hide

The forecast is only as honest as the list underneath it. I want that list in the same file as the statements, not in a founder’s head. At minimum, show:

• Revenue drivers: price, volume or customer count, mix, and the growth path, not just a single annual total
• Collection timing: when cash actually arrives, including any lag in receivables
• Direct costs and how they move with sales
• Operating expenses by category, including owner pay, and when each cost starts
• Hiring or contractor plans, with dates
• Capital expenditures: what you buy, what it costs, and when cash leaves
• Depreciation or other non-cash items, if they appear on the P&L
• Working capital: inventory, payables, deferred revenue if you bill in advance
• Financing: starting cash, owner contributions, debt draws and repayments
• Tax treatment in the model, even if the assumption is “no entity-level tax, pass-through to the owner”
• The time period (monthly for year one is usually more honest than a single annual column) and the scenario (base, and at least one slower case)

If a line doesn’t have a driver, it isn’t an assumption. It’s a guess wearing a number. A lender or a buyer will ask where the revenue comes from, how long customers take to pay, and whether the founder is actually in the expense stack. A buyer working through how to value a small business will not pay a premium for a net-income forecast that only works if the owner never takes a paycheck, or for cash that assumes every invoice clears in the same month it is billed.

A worked example that ties

Here is a labeled teaching example, not a real company’s books. A one-person service business is building a 12-month pro forma for year one.

The stated assumptions: customers grow in a straight line from 10 in month 1 to 40 in month 12, at $500 a month, billed at month-end and collected in 30 days. Delivery contractors cost 20% of revenue and are paid in the same month. The owner starts taking $4,000 a month in month 4. Rent is $1,200 a month, software $200, marketing $1,000. In month 1 the business spends $3,000 on equipment, depreciated straight-line over three years ($1,000 in year one). The owner contributes $25,000 of starting cash. There is no debt. The model assumes no entity-level income tax (a pass-through; owner tax sits outside the company statements).

Those drivers produce $150,000 of revenue: 300 customer-months times $500. Month 12 billings are $20,000, and because of the 30-day lag that amount is still in accounts receivable at year-end, so cash collected from customers is $130,000. Delivery cost is $30,000. Cash operating expenses are $64,800 (owner pay $36,000, rent $14,400, software $2,400, marketing $12,000). Depreciation is $1,000.

The statements tie. Net income of $54,200 is the retained earnings. Ending cash of $57,200 sits on both the cash flow and the balance sheet. Assets equal equity at $79,200. Notice what the P&L alone would hide: cash only rose $32,200, not $54,200, because $20,000 is still uncollected and $3,000 went to equipment (the $1,000 depreciation is non-cash). That gap is the point of doing all three statements. A forecast that ties still leaves a cash-management question: how the bank-account split in the Profit First method keeps profit and tax from looking spendable when the P&L looks fine.

What investors, lenders and buyers actually do with this

They test the assumptions. A 40-customer ending count is easy to type and hard to sell. A 30-day collection lag is optimistic for some businesses and conservative for others. If you also show a slower case, and the cash still lasts, the package gets more credible. If the base case only works with instant collections and no owner pay, it isn’t a plan. It’s a brochure.

Here is one slower case, using the same cost structure, still labeled as teaching math. Customers grow from 10 only to 25 by month 12. Revenue becomes $105,000. Month-12 receivables are $12,500, so collections are $92,500. Delivery costs fall to $21,000. Owner pay, rent, software, marketing, the $3,000 equipment purchase and the $1,000 depreciation stay the same. Net income drops to $18,200. Ending cash is $28,700: the account only grew $3,700 all year, even though the P&L still shows a profit. That is the version I would rather hand a lender than a base case with no downside.

The usual breaks are predictable. Hockey-stick revenue with no driver. Owner pay left off so net income looks rich. Every invoice treated as cash in the same month. A balance sheet that does not balance, or ending cash that does not match the cash flow. One annual column that hides a March shortfall behind a December total. If you already have history, start from those actuals and change only what you can explain. If you don’t, say so, and keep year one in months.

Lenders care about cash and debt service. Buyers care about whether the profit repeats when they are the ones running it. Investors care about when you need more money, and whether you know it. None of them need a branded template. They need a forecast you can walk through out loud, with the drivers visible, and with the three statements in agreement.

Build it in whatever spreadsheet you already use. Update it when a real assumption changes, not when you want the ending cash to look friendlier. And if a line only works in the model, change the business, not the font.

FAQ: Pro forma financial statements

What are pro forma financial statements?

They are a projected income statement, balance sheet and cash flow statement for a future period, built from stated assumptions. They show what the books would look like if those assumptions hold true.

What is the difference between pro forma and actual financial statements?

Actual statements report a period that already happened. Pro forma statements forecast a period that hasn’t. The formats are similar. The inputs are assumptions, not closed books.

Do the three pro forma statements have to tie?

Yes, if you want anyone to trust them. Net income should flow into equity, and ending cash on the cash flow statement should match cash on the balance sheet.

Which assumptions should I show on a pro forma?

Show revenue drivers, collection timing, direct costs, operating expenses including owner pay, capex, financing and working-capital lags. If a number has no driver, it’s a guess. Put the list in the same file as the statements.

What software do I need to build pro forma financial statements?

None in particular. A spreadsheet is enough if the three statements tie and the assumptions are written down. The tool matters less than whether you can defend the drivers.

Who asks for pro forma financial statements?

Investors, lenders and buyers commonly ask for a projected P&L, balance sheet and cash flow, plus the assumptions. You should also use the same package to see when cash actually runs short.

Cyber insurance for small business is a policy that pays for the fallout when your systems, data or accounts get hit: breach response, data recovery, lost income while you’re down, ransomware and the claims customers or regulators bring against you. It doesn’t stop an attack. It pays for what an attack costs, as long as you bought the right coverage and kept the security promises you made on the application.

You’ll also see it called cyber liability insurance, cybersecurity insurance or data breach insurance, and they don’t always mean the exact same thing. That difference matters, and I’ll get to it. This is education, not insurance or legal advice, so run your situation past a licensed broker before you buy anything.

What does cyber insurance for small business cover?

Most policies split into two halves. First-party coverage pays your own costs. Third-party coverage pays when someone else comes after you because of the incident. The NIST small business cyber insurance page points owners to the same split, and it’s the first question a good broker will ask you about.

Every policy words these differently, and plenty of items above are optional or capped. Read the declarations page, not the brochure.

Why small businesses are a target

Attackers don’t care how big you are. They care how easy you are. A five-person agency with one shared admin password and no backups is a better target than a bank, because the bank will fight back.

The numbers back that up. The FBI’s 2025 Internet Crime Report logged 1,008,597 complaints and $20.877 billion in reported losses for 2025, a 26% jump in losses over 2024. Business email compromise alone accounted for 24,768 complaints and more than $3 billion in losses. Those are people and businesses who reported it. Plenty never do.

Business email compromise is the one I’d worry about most if you’re small. Nobody has to break your firewall. They just have to convince your bookkeeper that the vendor changed bank details, or that you need a wire sent today. If you haven’t already, read up on deepfake CEO scams, because the fake voice on the phone is getting good. Then check whether your policy actually covers that kind of loss, which leads to the fine print below.

How much does cyber insurance cost for a small business?

Less than most owners expect, and more than zero. Insureon, an online insurance marketplace, says its small business customers pay an average of $129 a month, or $1,552 a year, for cyber coverage (figure from its cost page, checked November 2026). It also says limits typically run from $1 million to $5 million. Treat that as one marketplace’s data point, not your quote.

What moves your price:

• How much sensitive data you hold, like card numbers, health records or client files.
• Your industry and revenue.
• The limit and deductible you pick.
• Your claims history.
• Your security controls, which is where you have the most say.

Here’s a simple example to make it concrete. Say you run an online store with 8,000 customer records and $600,000 in revenue. You’ll be asked about card data, backups and MFA, and your answers will move the premium more than anything you can negotiate. Example only. Your broker’s quote is the real number.

What insurers ask about MFA, backups and training

Cyber applications have turned into security audits. Expect questions like these, and expect them to matter if you ever file a claim:

• Do you use multifactor authentication on email, remote access and admin accounts?
• Do you back up critical data, keep a copy offline or separate, and test restoring it?
• How fast do you install security updates?
• Do staff get phishing training?
• Do you verify payment changes by phone before money moves?

Be honest on that form. If you say MFA is on everywhere and it isn’t, you’ve handed the insurer a reason to fight your claim. And if MFA isn’t on, turn it on this week. CISA’s guidance for small businesses puts it bluntly: “Any form of MFA is better than no MFA.” It’s cheap, it’s fast and it lowers your risk before you’ve paid a cent in premium.

Cyber insurance vs a BOP data breach add-on

This is where people get caught. A lot of business owner’s policies (BOPs) let you add a data breach or cyber endorsement for a small extra charge. That’s not nothing. But those add-ons are often first-party only, with low limits, and they may not touch ransomware, funds transfer fraud or lawsuits from customers.

A standalone cyber policy usually covers both halves with higher limits. General liability normally isn’t built for this at all, and professional liability (E&O) covers mistakes in your services, not a hacker emptying your systems. If you’re still mapping which policies you need in the first place, start with what business insurance do you actually need and come back here for the cyber piece.

When is the add-on probably enough? If you hold very little customer data, take payments through a processor and don’t wire money. When do you want standalone? If you store client data, run an online store, handle health or financial records, or a client contract requires a set cyber limit.

The fine print that decides your claim

The headline limit is the number people brag about. The sublimits are what pay out. Look hard at these:

• Social engineering and funds transfer fraud. Often a separate, much smaller sublimit. Sometimes excluded unless you ask for it.
• Ransomware sublimits. Some policies cap extortion and related costs well below the full limit.
• Business interruption waiting period. The hours you have to be down before income loss coverage starts.
• Panel vendors. Many policies want you to use their approved forensics firm and breach lawyer. Know who they are before you need them.
• Security warranties. Controls you promised on the application that can come back to bite you.
• Claims-made terms. Most cyber policies are claims-made, so gaps in coverage and retroactive dates matter.

Here’s what I’d do before calling a broker

1. List the data you hold and where it lives. Email, CRM, payment tools, shared drives.
2. Turn on MFA everywhere it’s offered, starting with email and banking.
3. Set up backups and test a restore. A backup you’ve never restored is a guess.
4. Write a one-line rule for payment changes: no new bank details without a phone call to a known number.
5. Pull any client contracts and note the cyber limits they require.
6. Then get quotes from a licensed broker who works with several carriers, and ask for the sublimits in writing.

Most owners know they should do half of that list. Knowing isn’t the same as doing. The business that’s done the work pays less, gets approved faster and has a cleaner claim if the worst happens.

Frequently Asked Questions

Do small businesses really need cyber insurance?

If you store customer data, take payments, send wires or rely on systems to earn money, it’s worth pricing. The FBI logged more than $3 billion in business email compromise losses in 2025, and small firms are easy targets.

Is cyber insurance the same as data breach insurance?

Not always. Data breach insurance usually means first-party breach costs, often as a BOP add-on. A full cyber policy typically adds third-party liability, ransomware and business interruption.

Does general liability cover cyber attacks?

Usually not. General liability is built for bodily injury and property damage claims. Cyber losses normally need a cyber policy or endorsement.

Does cyber insurance cover ransomware?

Many policies cover ransomware response, recovery and sometimes the extortion payment, often under a sublimit. Payments also have to comply with sanctions rules, so check the wording with your broker.

Does cyber insurance cover wire fraud or business email compromise?

Only if the policy includes social engineering or funds transfer fraud coverage, which is often a separate, smaller sublimit. Ask for it by name.

How much cyber insurance coverage do I need?

Published small business policies commonly start at $1 million. The right limit depends on your records, revenue and contracts, so get a licensed broker to size it with you.

An 83b election is a choice to include the value of restricted property, usually stock, in your gross income in the year it’s transferred to you, instead of waiting until it becomes substantially vested. You include the excess, if any, of the property’s fair market value at transfer over the amount you paid for it. The election has to be filed no later than 30 days after the transfer date, on IRS Form 15620 (Rev. 4-2025) or a written statement that meets the same requirements. There is no extension of that 30-day clock.

You’ll also hear it called a section 83b election or an 83b filing. Same election. If you make it, later appreciation generally is not treated as compensation when the shares vest. If you skip it, you include the spread at vesting, when the shares may be worth a lot more. This is education, not tax or legal advice, and it is not a reason to file automatically. Talk to a CPA or startup counsel before you sign anything.

When an 83b election even comes up

The election applies when substantially nonvested property is transferred to you in connection with performing services, as an employee or an independent contractor. In a startup, that usually means restricted common stock you receive as a founder or early hire, or shares you get by early-exercising options that are still subject to vesting.

It does not apply to the option itself. IRS Publication 525 (2025) is explicit: you can’t make this choice for a statutory or nonstatutory stock option. The choice is about the restricted stock (the property) once it’s been transferred to you. If you’re early-exercising incentive stock options, alternative minimum tax and the ISO holding-period rules can change the analysis. That’s a question for your CPA, not a shortcut in this article.

Vesting itself is a separate conversation from this filing. If you and a co-founder are still working out the founder equity split and the vesting schedule, settle that first. The 83b election is what you may need to file in the 30 days after those unvested shares actually transfer.

What you include in income if you file

Form 15620 walks through the math. You report the fair market value of the property at the time of transfer, determined without regard to lapse restrictions, minus the amount you paid. That difference, if any, goes into your gross income for the tax year that includes the transfer date.

Here’s a simple teaching example, with made-up numbers. You receive 1,000,000 shares of restricted common stock. You pay $0.0001 a share, or $100 total. A recent independent appraisal puts fair market value at $0.001 a share, or $1,000. If you file a timely 83b election, you include $900 in income ($1,000 minus $100). If the company later succeeds and those shares are worth much more when they vest, that later appreciation is not included as compensation at vesting. Your basis for a later sale is what you paid plus what you included as compensation, according to Publication 525.

Fair market value is not a guess you jot in a notebook. For private company stock, it often comes from a 409A valuation. Use the value your counsel or CPA tells you belongs on the form, and describe the shares and the vesting restrictions clearly. Form 15620 asks for the quantity, the transfer date, the tax year, the restrictions, the value, the amount paid and the income to include.

The 30-day deadline is the whole game

Form 15620 says the election must be filed no later than 30 days after the date the property was transferred. If the 30th day falls on a Saturday, Sunday or legal holiday, IRC section 7503 lets you treat it as timely if it’s postmarked by the next day that is not a Saturday, Sunday or legal holiday. That’s the only flexibility the form’s instructions give you.

There is no “I’ll catch it on next year’s return” version of this. A late 83b election is generally not an 83b election. If the transfer already happened, count the days today. If the transfer hasn’t happened yet, build the filing into the closing checklist so you’re not starting the clock and then looking for a form. If the shares are being issued around a financing, read the term sheet’s option-pool and valuation language first, because those terms change what a share is worth and how much of the company you actually received.

How to file Form 15620

Publication 525 for 2025 says you can make the choice by filing a written statement or Form 15620 with the Internal Revenue Service Center where you file your return, no later than 30 days after the transfer. The Form 15620 instructions (Rev. 4-2025) describe mailing a completed, signed form to the IRS office where you file your federal income tax return. A written statement that satisfies Treasury Regulation section 1.83-2 is still an alternative.

The IRS has also published Form 15620 as a form you can complete on IRS.gov. Before you file, check the current Form 15620 page and Publication 525 for the submission method that applies to you, including any online option. Don’t send the same election twice. Keep proof that you filed on time, whether that’s a mailing receipt or an online confirmation.

A copy still has to go to the company (the person for whom you performed the services). If you and the transferee of the property are not the same person, a copy has to go to the transferee too. The form itself includes an agreement to provide those copies. Keep a signed copy for your own records. Filing with the IRS is not the same as telling payroll or your cap table administrator.

What happens if you miss the deadline

If you don’t make a timely election, the default rule in Publication 525 applies. You generally don’t include the value in income at transfer. When the property becomes substantially vested, you include its fair market value at that time, minus any amount you paid, as compensation. Your holding period, under that default rule, begins when the property becomes substantially vested.

Go back to the teaching example. If you never file, and four years later 1,000,000 shares vest when they’re worth $1 a share, the spread that can show up as compensation is $1,000,000 minus the $100 you paid. That’s a different outcome from including $900 in the year of transfer. Whether filing would have been smart depends on the real value at transfer, the risk that you’ll forfeit the shares, and your tax situation. It is not automatically “file, always.”

What happens if you file and later forfeit the shares

This is the risk people skip past. An 83b election may not be revoked except with IRS consent. Publication 525 says consent will be given only if you were under a mistake of fact as to the underlying transaction. Changing your mind, or leaving the company, is not that.

If you forfeit the property after you’ve already included its value in income, Publication 525 says your loss is the amount you paid for the property minus any amount you realized on the forfeiture. In plain terms, you generally don’t get back the compensation income you already included. If you paid little or nothing for the shares and you get nothing back when you leave, there may be no loss to claim. Form 15620 points to Treasury Regulation section 1.83-2(f) and Revenue Procedure 2006-31 for revocation guidance, and section 83b(1) is the statute behind the forfeiture rule.

That’s why “the shares are cheap today” is not, by itself, a complete reason to file. Cheap shares and a high chance you’ll be gone before they vest can still produce a tax bill you can’t recover. Walk through both sides with a CPA.

What to do in the first 30 days

If restricted stock has just been transferred to you, or is about to be, do this in order:

1. Confirm the transfer date and start counting 30 days from that date, not from the day you remembered to deal with it.
2. Get the facts for the form: share class and quantity, restrictions, amount paid, and fair market value at transfer.
3. Sit down with a CPA or counsel before you file, especially if the value isn’t tiny, you might leave, or ISOs are involved.
4. File Form 15620 or a valid written statement on time, then give the required copies to the company (and the transferee, if that’s someone else) and keep proof.

I’m not your tax advisor, and this isn’t advice for your return. The sources for the rules in this article are Form 15620 (Rev. 4-2025) and Publication 525 (2025). Use them with a professional who can apply them to your grant, your filing status and your state.

Frequently asked questions

What is an 83b election?

An 83b election is a choice to include restricted property in your income at transfer, equal to fair market value minus what you paid, instead of waiting until the property becomes substantially vested.

How long do I have to file an 83b election?

You must file no later than 30 days after the property is transferred. If day 30 is a Saturday, Sunday or legal holiday, the Form 15620 instructions treat it as timely if it’s postmarked by the next business day. There is no general extension.

What form do I use for an 83b election?

IRS Form 15620, Section 83b Election (Rev. 4-2025), or a written statement that satisfies Treasury Regulation section 1.83-2. Publication 525 says either can be filed with the IRS service center where you file your return.

What happens if I miss the 83b deadline?

A late election generally doesn’t count. You then follow the default rule and include the fair market value minus what you paid as compensation when the property becomes substantially vested, which can be a much larger number.

Can I revoke an 83b election if I leave the company?

No, not on your own. The election can’t be revoked without IRS consent, and Publication 525 says consent is given only for a mistake of fact as to the underlying transaction.

Do I get a loss if I filed an 83b election and later forfeit the shares?

Usually not for the income you already included. Publication 525 says your loss is the amount you paid minus any amount you realized on the forfeiture, which can be zero if you paid little or nothing.