The Tax Cuts and Jobs Act was passed by both chambers of Congress on Wednesday, December 20, 2017, and will be sent to the President’s desk for final signature. The Fenwick & West team will provide a more detailed analysis in the coming days. This update offers a few highlights of provisions that will affect equity compensation.
Individual Alternative Minimum Tax (AMT)
Although initial versions of both the Senate and House bills called for a repeal of the AMT at the corporate and individual levels, the individual AMT will now remain (although at a temporarily higher threshold). As a result, incentive stock options will continue to be less attractive for higher income earners impacted by the tax.
Tax Deferrals for Private Company Equity Incentives
Rules enabling certain private company employees to defer taxation on option exercise and settlement of restricted stock units for up to five years will offer some liquidity relief to the start-up community. As discussed in previous alerts, there are a number of complexities surrounding the design of eligible equity plans and reporting obligations that will require further clarification by implementing guidance. Still, the new provisions may prove to be particularly helpful to private companies that are considering granting restricted stock units in lieu of options, and offer flexibility to former employees who must exercise their options within a few months of separation to avoid forfeiting their shares.
162(m) Repeal of Performance Exceptions
The repeal of performance-based compensation exceptions to the $1 million deductible limit for remuneration paid to highly compensated employees of public companies remains somewhat tempered by a lower overall corporate tax rate. The final rules include a grandfather provision for previously deductible amounts paid pursuant to written contract in effect on November 2, 2017, provided that the contract is not subsequently materially amended. The Joint Explanatory Statement of the Conference Committee released with the final legislative text offers clarifying guidance on the intended scope of the grandfather exception, though it is not yet clear whether any Treasury regulations or other guidance will offer additional transition rules for existing equity awards or newly public companies.
Read our prior analysis of developments in tax reform: “Proposed Tax Reform Bill as Amended Stands to Significantly Impact Equity and Performance-Based Compensation.”