Sage-Tips

How often are 409A valuations done?

once every 12 months
Companies are expected to conduct 409A valuations at least once every 12 months, or when a material event has occurred that would affect the value of the company – whichever occurs sooner.

What triggers 409A?

Section 409A Compliance Requirements Section 409A triggering payment events are: The employee’s disability, death, or separation from the business; A change in control of the business; The occurrence of an unforeseeable emergency; or.

What is 409A compliance?

Section 409A of the United States Internal Revenue Code regulates nonqualified deferred compensation paid by a “service recipient” to a “service provider” by generally imposing a 20\% excise tax when certain design or operational rules contained in the section are violated.

How are private companies strike prices determined?

For private companies, FMV is essentially what the price would be if the stock were traded publicly on the open market. Your stock option strike price is usually equal to the FMV of the company’s stock on the day the option is granted. That’s the price that people are willing to pay on the open market.

What is a 409A valuation for a private company?

For a privately-held company, the 409A valuation is the only method you can use to grant options on a tax-free basis to your employees. (For more on how startup options work and key terms involved, please see this post .)

How can I ensure my property is a 409A safe harbor?

The easiest and most common way to ensure 409A safe harbor is to have a qualified, independent valuation provider conduct the 409A analysis.

What are the tax consequences of a 409A audit?

This can cause major tax issues. Any option holders discovered to be in violation of 409A will have to pay taxes plus a 20 percent federal penalty, any applicable state penalties, an IRS tax underpayment penalty, and any interest on unpaid taxes. Most startups likely won’t face a 409A audit from the IRS.

What is Section 409A of the labor law?

Added as part of the American Jobs Creation Act of 2004, it states: Section 409A applies to compensation that workers earn in one year, but that is paid in a future year. This is referred to as nonqualified deferred compensation.