Business is back . . . Sort of

As the country begins its hoped-for recovery from the disruptive economic effects of the COVID-19 virus – or, more accurately, from the measures implemented by government to contain the spread of the virus – some closely held businesses will emerge relatively unscathed while others will not survive,

Deferred Compensation
It is not uncommon for a closely-held business to provide an economic incentive to its key employees. The incentive may take the form of compensation the payment of which is deferred until the compensation is “earned,” which may be upon the occurrence of some specified business-related event, such as the sale of the

A closely-held business will often use deferred compensation arrangements to induce or reward certain behavior by its key non-shareholder executives; for example, to incentivize the executive to attain certain business performance goals or operational benchmarks.

Such an incentive arrangement will defer the payment of compensation such as a bonus until the compensation is earned, usually

Yesterday we reviewed the IRS’s determination that a nonstatutory stock option (NSO) violated Section 409A. Today we will review the income tax consequences of such failure.


Income Inclusion under Section 409A

Section 409A provides that, if at any time during a taxable year a nonqualified deferred compensation plan fails to meet certain distribution-timing requirements, or

Incentive Compensation

It is not uncommon for a closely-held business to provide an economic incentive to its key employee. Often, the incentive takes the form of an annual cash bonus. Alternatively, the business may provide the key employee with a longer-term incentive, in the form of a deferred compensation arrangement that may be payable on

Nonqualified Deferred Compensation

In general, a nonqualified deferred compensation plan allows an executive to defer the “receipt” and income taxation of a portion of his compensation to a tax period after the period in which the compensation is earned (i.e., the time when the services giving rise to the compensation are performed). 

The payment of