After the nation waited months to see it, the House of Representatives revealed its proposed tax bill in November 2017. They suggested calling it the Tax Cuts and Jobs Act of 2017 if it were approved. The media, bloggers and citizens across the United States had been talking and speculating about the bill and what it might include. Although the concepts detailed in it had been hot topics for several months, New York based attorney Jeremy Goldstein still thinks there are some provisions in the bill that would greatly change taxation for some people.
Proposed Tax Changes For Executive Compensation
Sections 3801 and 3802 of the proposed bill would change how executive compensation is taxed. The first section of the bill makes all compensation received by executives taxable when there is no risk of forfeiture, which means that satisfying performance goals or agreeing not to compete would not qualify. If providing substantial services is required, this would qualify as a forfeiture risk. This means that after an executive performs services, the income earned from those services becomes immediately taxable. The rule applies even if compensation has not been issued yet, and it does not take into account possible performance conditions of compensation.
Section 3802 eliminates the exception of performance-based compensation for the $1 million limit deduction outlined in the Internal Revenue Code’s Section 162(m). This means that compensation paid to CEOs and other high-level executives in public companies would not be deductible when it is over $1 million in a tax year. The rule applies even if the compensation was based on reaching performance goals. Additionally, the definition of a covered employee was expanded. In the past, a company’s chief financial officer was excluded. However, the definition was broadened to include the CFO. Anyone who is a CFO or a CEO during a fiscal year will be included even if their title is not the same on the last day of that year.
Changes Stemming From The Bill
If the bill becomes a law, tax experts are predicting several important changes. First, since RSU taxation would happen when RSUs vest rather than when they are settled in stock or cash, there would no longer be deferred settlements. Also, stock appreciation rights and compensatory stock options would be subject to taxation when they vest, which means that these rights and options would not be utilized as much. Since compensation would be taxable as soon as it is earned regardless of deferring activities, there would likely be an elimination of elective deferred compensation plans.
Performance-based compensation would likely decrease in use because of performance-based vesting no longer being relevant in a tax aspect or through potential forfeiture risk. With taxing of compensation being delayed by vesting schedules, the schedules would probably become lengthier and more common. Since the changes in the bill would make it harder for private companies and their management teams to build compensation structures that are only taxable when they have liquidity to pay taxes, the proposed changes would be especially challenging for them. If services were performed before January 1, 2018, there is a proposed protective clause for them that grandfathers attributed compensation before that time to give companies some relief during the transition. However, the amounts must be included in future tax years unless there is a substantial risk of forfeiture of the compensation.
Since the bill will likely be passed and adopted as law, legal experts recommend that affected companies and executives follow the provisions and be prepared to find solutions. For example, some companies may be able to lengthen their vesting periods between the time of bill approval and the bill becoming effective as law.
Who Is Jeremy Goldstein?
Jeremy Goldstein earned a bachelor’s degree from Cornell University and a master’s degree from the University of Chicago. He earned his law degree from New York University School of Law. After working for a large law firm in New York and becoming a partner, Jeremy started his own law firm. As a founding partner of Jeremy L. Goldstein & Associates LLC, Jeremy dedicates his time to helping CEOs, compensation committees, management teams and corporations with corporate governance and executive compensation matters. He also focuses on sensitive situations and corporate events that transform companies.
In the past 10 years, Jeremy has been active in some of the biggest corporate transactions. These are just a few of those transactions:
- Goldman Sachs et al./Kinder Morgan Inc.
- Duke Energy/Progress Energy
- The Dow Chemical Company/Rohm and Haas Company
- NYSE Group Inc./Euronext
- Cingular Wireless Corporation/AT&T Wireless Services Inc.
- Chevron Texaco Corporation/Unocal Corporation
- J.P Morgan Chase & Co./Bank One Corporation
Jeremy also serves on the American Bar Association Business Section’s Executive Compensation Committee. Specifically, he is a chairperson for the Mergers & Acquisitions Subcommittee. When he is not busy working on major transactions, Jeremy speaks at events about executive compensation and corporate governance. Also, he enjoys writing about related matters and is a respected authority figure on both subjects. He is listed as a leading executive in these specialties in multiple legal guides. Jeremy is a member of the NYU Journal of Law’s Professional Advisory Board. He also serves as a board member for Foundation House, which is a charitable organization that assists men and women who are living with mental illnesses.