What is Section 409A?

  • Tax

Section 409A of the Internal Revenue Code was introduced as part of the American Jobs Creation Act to regulate nonqualified deferred compensation. It applies to arrangements where employees or service providers defer income to a future tax year, including stock options in private companies. The goal is to prevent executives and others from timing their compensation to minimize taxes unfairly. Without proper compliance, deferred amounts could become taxable immediately, along with additional penalties.

R&D Offer Quiz

Step 1 of 3

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.