A Closer Look at 409A Valuations

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409A valuations are basically an insurance policy, which a company can rely on for protection and support if a future IRS audit claims the company did not establish appropriate fair market value for its stock or equity incentives. When this valuation is created by a qualified professional, it provides “safe harbor” protection that shifts the burden of proof for noncompliance from the company to the IRS. This peace of mind is important, since failure to comply with 409A guidelines can result in sizable state and federal tax consequences. In some cases, penalties for both the company and individual equity option recipients can total as much as 60 to 75 percent of total awards granted.