Tax cuts and jobs act stock options

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In the executive compensation context, the TCJA made significant changes to Code Section m , including eliminating the popular exceptions for qualified performance-based compensation and commissions and broadening the definition of "covered employee" 26 U. In addition, the TCJA allows qualified employees of private corporations to make an election to defer the recognition of income on illiquid company stock acquired through the exercise of stock options or settlement of restricted stock units see Section 83 i : Qualified Equity Grants Checklist.

Under the TCJA, from a labor and employment perspective, when settling claims of sexual harassment or abuse, employers can no longer take a tax deduction for those settlement payments or attorneys' fees "related to such a settlement" if the agreement contains a confidentiality or nondisclosure provision 26 U. This restriction applies to settlement and attorneys' fee payments made after the TCJA's enactment. Real Estate.

Regulations and the Joint Committee report, which will add details, are expected over the next months. The Act changes section m of the Code. However, section m included the following exemptions and exceptions, which provided significant opportunities for avoiding the m limits:.

Thus, prior to the Act, section m favored deferred compensation over current compensation, performance bonuses over salary and stock options over direct equity grants.

The Act eliminates all of the exemptions and exceptions. The changes eliminate the section m biases for deferred compensation, performance bonuses and stock option.

We expect that companies will react to this by reevaluating the mix of stock options vs. Proxy statements will have to reflect the non-deductibility of amounts that were previously described as deductible under one of the exemptions.

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Compensation payable pursuant to a legally binding agreement such as a stock option agreement that was in place prior to November 2, continues to be subject to section m as it was in effect prior to the Act , including all of the exemptions and exceptions discussed above. The Act expands section m coverage see above to include private companies that are required to file reports under section 15 d of the Securities Exchange Act. This includes, for example, private companies that have publicly issued debt.

Why US tax reform may cause executive pay shake-up

The general rule for taxability of equity grants is that they are taxed at the later of grant or vesting. An employee may elect to be taxed at grant.



One of the big concerns in respect of equity grants to employees of private companies is that the employees cannot sell the stock in order to raise the funds to pay the taxes.