What is IRC Section 409A?

  • Finance

IRC Section 409A is a U.S. tax regulation that governs nonqualified deferred compensation arrangements, including equity-based compensation. It defines how and when compensation can be deferred and paid. Noncompliance can result in immediate income inclusion, a 20% federal penalty tax, and interest charges. The rule exists to prevent abuse of deferred compensation and ensure proper taxation. 409A valuations are a core mechanism companies use to comply with these requirements and avoid costly tax consequences?

R&D Offer Quiz

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Answer to find out if you're eligible for R&D tax credits.

Do the activities performed relate to a new or improved business component’s function, performance, reliability, quality, or composition?(Required)
For Example: A mid-sized packaging company develops a slightly modified cardboard box design to improve its stacking strength (reliability) for warehouse storage, involving minor adjustments to the corrugation pattern to reduce collapse under standard weight loads.
Is your company trying to discover information to eliminate uncertainty concerning the capability or method for developing or improving a business component?(Required)
For Example: A furniture manufacturer investigates whether a cheaper wood adhesive can hold joints as effectively as the current one during assembly, testing bond strength to resolve doubts about its capability in standard production lines.
Do the activities performed constitute a process of experimentation?(Required)
For Example: An auto parts supplier runs a series of bench tests on different lubricant formulations to find one that reduces friction in engine bearings more effectively, systematically comparing wear rates over simulated operating cycles.