Client Alert: Executive Compensation Tax Change
- Confirm with tax accountants any necessary steps to ensure that 2017 bonuses payable in 2018 will be deductible in 2017 (e.g., resolutions or other certifications necessary to satisfy “all events” test for deductibility).
- If considering the acceleration of bonus payments into 2017 to ensure deductibility, make sure to also consider potential impact on individual executives who may benefit from lower tax rates in 2018.
On December 22, 2017, President Trump signed into law the 2017 Tax Cuts and Jobs Act ("the Act"). The Act will significantly reduce the corporate tax rate and lower individual tax rates. The key executive compensation change resulting from the Act is an expansion of the Internal Revenue Code’s $1.0 million compensation deduction limit. For an overview of the changes to Code Section 162(m), please see our December 7, 2017 Client Alert, Proposed Tax Changes Would Expand Compensation Deduction Limit.
In addition to the expansion of the 162(m) deduction limitation, the Act provides two other executive compensation related changes worth noting.
- First, the Act provides a tax deferral opportunity with respect to certain equity awards made to employees of a private company employer that has implemented its equity incentive plan on a broad basis (i.e., at least 80% of full-time employees).
- Second, with respect to certain limited liability company equity awards, the Act extends from one-year to three-years the required holding period for a “profits interest” to be eligible for capital gain treatment.
We expect the Internal Revenue Service will issue guidance with respect to these changes in the coming months. As such, we recommend all companies continue to monitor the implementation of these new rules.
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Please call us if you would like to discuss any of these issues or if we can otherwise be of assistance.