Late last week the IRS issued updated withholding tables to conform employee wage withholding to the new tax rates put in place by the Tax Cuts and Jobs Act (you can read more about the TCJA here). The new tables are designed to work with existing W-4s, although the IRS also announced that it is developing a new W-4 for use in future tax years. Employers are required to begin using the new wage withholding tables by February 15, 2018. You can view the new wage withholding tables here. Continue Reading
On December 15, the Conference Committee reconciling the House and Senate tax reform bills released its full bill text to be voted on by both chambers of Congress and, if approved, presented to the President. The compensation provisions in the final bill are substantially the same as those in the Senate bill. The most important of these provisions are as follows:
Deduction Limit on Executive Compensation Paid by Public Companies.
The final bill makes the following changes to Section 162(m):
- The exceptions for performance-based compensation (including stock options) and commissions are repealed.
- The list of covered employees is expanded to include the CFO.
While the last-minute changes made to the Senate Bill brought the House and Senate Bills closer together, a number of important differences remain. The House and Senate will attempt to hammer out these differences over the next few weeks in conference committee. In the meantime, we have prepared a comparison of the more salient provisions of the two bills.
You can view the full text of the bills on our House Bill Navigator and Senate Bill Navigator. We also ran a comparison of the final Senate Bill against the initial legislative text, which is available here. Continue Reading
In the early morning hours of December 2nd, the Senate passed its own version of the tax reform bill. The compensation provisions in the final Senate Bill are very similar to those in the final House Bill, with only a few exceptions.
Outside of the provisions directly impacting compensation, described below, the Senate Bill differs from the House Bill in two key ways, which could have a significant effect on compensation program decisions depending on how they are ultimately reconciled.
- First, the Senate Bill reduces the corporate tax rate effective January 1, 2019, as opposed to January 1, 2018 in the House Bill.
On November 14, the Joint Committee on Taxation released a summary of the Chairman’s Modifications to the Senate’s tax reform bill, which add or remove a number of provisions relating to compensation.
- Deferred Compensation. The Chairman’s Modifications remove a provision that would have taxed almost all compensation at vesting (when no longer subject to a service requirement) and thereby effectively would have ended the ability to defer compensation. This provision was included in the original House bill but was not included in the bill passed by the House.
- Deferral of Stock Options and RSUs. The Chairman’s Modifications add a provision that allows employees of certain private companies to elect to defer the taxation of stock options and RSUs for up to five years after exercise of the options or settlement of the RSUs.
Last night the Joint Committee on Taxation released a description of Senate Finance Committee Chairman Hatch’s proposed Modifications to the Senate Mark of the Tax Cuts and Jobs Act. Reports in anticipation of the Chairman’s Modifications had described them as intended to reduce the deficit increases otherwise expected under the initial Senate Mark. The JCT also released an updated score last night that reflects the impact of the Chairman’s Modification. In addition to modifying the tax brackets applicable to individuals, increasing the child tax credit, and repealing the individual mandate to obtain health insurance under the Affordable Care Act, the Modification make several noteworthy revisions to the original Chairman’s Mark. Continue Reading
The House and Senate versions of the Tax Cuts and Jobs Act would each have a significant impact on private equity firms, investors and portfolio companies.
We have prepared a presentation that summarizes many of the relevant provisions as they currently stand in each version and highlights their differing impact on private equity. This follows our post from last week highlighting the provisions in the House tax bill affecting private equity. Continue Reading
On November 9, the Senate released a detailed summary of its tax reform bill, which includes several provisions relating to compensation. The compensation provisions in the Senate Mark are very similar to those included in the final House bill, with the notable exception of the deferred compensation provision. According to the Senate Mark, the Senate bill effectively eliminates deferred compensation (including non-statutory stock options) and penalizes compensation paid to top earners at public companies and tax-exempt organizations. If enacted in the form described in the Senate Mark, the Senate bill is likely to have a dramatic impact on how companies pay their executives, directors and key employees. Continue Reading
The Senate Finance Committee Chairman’s Mark (Senate Mark) released last night diverges sharply in many respects from the House Bill. Although in summary form, the Senate Mark describes a comprehensive tax reform proposal that will take some time to analyze. In the meantime, the table below summarizes key features of the Senate Mark, together with a comparison to the final House Bill.
We have also released an initial version of our Senate Bill Navigator, a hyperlinked version of the Senate Mark built to ease your navigation of its text, which you can find here.
Corporates. As expected, the Senate Mark calls for a permanent reduction in the corporate tax rate to 20%, with implementation delayed until 2019. Continue Reading
Chairman Brady released another manager’s amendment to the House Bill this afternoon. This amendment was promptly approved by the House Ways and Means Committee 24-16 and included in the House Bill reported to the floor.
We have incorporated this amendment into the text of the Chairman’s Mark and have generated a PDF comparison showing the revised sections, which you can find here. Click here for a comparison that shows the entirety of the bill’s text. Both comparisons are against the bill as amended on November 6th. We will follow up in the morning with an updated Tax Bill Navigator, reflecting the final bill as reported to the House floor. Continue Reading
The House tax bill contains several provisions that could significantly affect private equity sponsors, investors and portfolio companies. Below we have highlighted a number of these proposals, including discussions of:
- Carried Interest
- Changes in Rates
- 25% Rate on Certain Pass-Through Income
- State and Local Income Taxes
- Interest Deductibility
- Deferred Compensation
- Compensatory Stock Options Issued by Certain Closely Held Corporations
- International Tax Changes
- State Pension Plans
- Changes to Self-Employment Tax
Carried Interest. The House bill generally would limit the favorable taxation of carried interest to investments that have a holding period of more than three years, and treat carried interest attributable to gains on investments held for three years or less as short-term capital gain (taxed at the rates applicable to ordinary income). Continue Reading
Over the past week, Republican lawmakers in the House of Representatives have proposed sweeping tax reform legislation, including a series of amendments to the initially proposed bill. As companies enter their year-end compensation planning to develop compensation programs for 2018, they may wish to keep in mind certain aspects of the proposed legislation that may dramatically change how companies choose to compensate employees, executives and directors. A memorandum outlining these issues is available here.
The House tax reform bill is still undergoing changes through the mark-up process in the House, and the Senate is expected to release its own bill later this week, which may include very different provisions relating to compensation and employee benefits. Continue Reading
The House tax reform bill, as released on November 2, proposed changes to the taxation of stock options that would result in them no longer being a tax-efficient compensation tool for companies and employees, without a demonstrated corresponding tax revenue benefit for the Treasury. Specifically, it provides that all stock options (including incentive stock options or “ISOs” and qualified ESPP options) and restricted stock units (“RSUs”) would be taxable when they vest (even if not yet exercised or settled) , unless exercised or settled by March 15 of the year after the year in which they vest. Currently, options are taxable at exercise. Continue Reading
Last night Chairman Brady released the first set of amendments to the Chairman’s Mark released last Friday. We have incorporated these amendments into the text of the Chairman’s Mark and have generated a PDF comparison showing the revised sections, which you can find here. Click here for a comparison that shows the entirety of the bill’s text.
In addition to modifying the earned income tax credit, the Chairman’s amendment limits the favorable taxation of “carried interest,” so that long-term capital gains rates will apply only to gains from investments that have been held for more than 3 years. To address concerns around the House bill’s treatment of deferred compensation in the context of start-ups, the amendment also adds a provision that would defer the recognition of income on the exercise of compensatory options or the settlement of restricted stock units issued to certain employees of private companies for up to five years (in limited circumstances). Continue Reading
Last week was a busy week at Tax Reform And Transition. House Republicans released text of a tax reform bill on Thursday (view the full bill through our Tax Bill Navigator), followed by an official Chairman’s Mark on Friday. Late Friday night, the Joint Committee on Taxation released an official summary of the Chairman’s Mark, together with their assessment of the revenue effects and distributional effects of the Chairman’s Mark.
You can read our grid summarizing the key provisions of the bill here. Here’s a round up of the tax reform topics covered in our more detailed posts so far:
- Corporate tax, including limits on interest deductions
- Taxation of Pass-through Income
- Deemed Repatriation
- Minimum Tax on High-Profit Foreign Subsidiaries
- 20% Excise Tax on Payments to Non-U.S.
The House tax reform bill released yesterday (as revised today) effectively shuts down nonqualified deferred compensation and penalizes compensation paid to top earners at public companies and tax-exempt organizations. If enacted in its current form, the bill is likely to have a significant impact on how companies and tax-exempt organizations pay their executives and key employees.
Nonqualified Deferred Compensation. Current law permits employees and other service providers to defer compensation, subject to compliance with Section 409A (e.g., timely elections, payments made only on specified dates or permissible events). The bill effectively repeals Section 409A and adds Section 409B, which all but eliminates the ability to defer compensation, and which significantly expands how deferred compensation is defined. Continue Reading