Win Some, and Then Some: Equity Compensation Tax Reform

In this week’s blog post, we present a select reading list that has helped us keep up with recent legislative developments around equity and executive compensation.

House Tax Bill Targets Deferred Compensation, High-Paid Execs

by Ashlea Ebeling

Early versions of the House tax reform bill included two provisions that could curtail the use of equity as part of employee compensation.

• First, a proposed new Section 409B would eliminate current exemptions for stock options and related instruments from the purview of Section 409A. If enacted, the new proposals would make equity awards taxable upon vesting, i.e. prior to exercise or settlement.
• Second, Section 162(m) exceptions for performance-based executive compensation, including equity, would be eliminated. Currently, Section 162(m) caps corporate deductibility of executive pay at $1 million, except amounts that qualify for exceptions.  With a hard(er) cap on deductions, tax bills for equity-granting employer companies could increase.

In addition, tax-exempt organizations would be liable for an excise tax of 20 percent on executive compensation, including severance or parachute payments, in excess of $1 million.  (h/t @Forbes)

Comparison of House and Senate “Tax Cuts and Job Acts” Bills

by Maureen J. Gorman, Debra B. Hoffman, and Ryan J. Liebl, Mayer Brown LLP

This reading offers a more granular look at current tax rules and proposed changes to nonqualified deferred compensation including stock options and stock appreciation rights (SARs), restricted stock units (RSUs), and other components of executive compensation.  Amendments to the House bill removed provisions that would tax equity compensation upon vesting.

Further, via a new Section 83(i) election, the House bill would allow recipients of broad-based equity awarded by private companies to defer taxes for up to five years after exercise (for options) or settlement (for RSUs).  Still, early versions of the corresponding Senate bill included provisions that would tax equity compensation upon vesting. (h/t @HarvardCorpGov)

Don’t Tax Options And RSUs Upon Vesting!

by Fred Wilson

VC Fred Wilson responded to provisions in the early Senate bill with a political call to arms, reflecting tech start-ups’ agita vis-à-vis taxation of stock compensation.  (h/t @avc)

Executive Comp Tax Reform: One Day You’re In and One Day You’re Out

by Susan E. Stoffer, Nelson Mullins Riley & Scarborough LLP

The tax reform bill passed by the House on November 16, 2017 did not include provisions that would have taxed equity compensation upon vesting, but did provide for the five-year tax deferral after exercise or settlement.  The amended Senate bill has adopted largely similar provisions.

However, the now-passed House bill and the corresponding Senate version under consideration eliminate Section 162(m) exceptions for performance-based equity compensation granted by public companies.  (h/t @NelsonMullins)

This Week: Senate Republicans Take Up Tax Reform

by Cristina Marcos

The ruling party aims to get a bill ready for the Executive imprimatur by year-end.  (h/t @thehill)

While further changes to the provisions are possible until the Senate’s passage of a tax reform bill and any subsequent reconciliation with the House version, we will continue to follow legislative and other developments regarding equity and executive compensation on our blog.

For both start-up and mature companies, Mercer Capital’s valuation experts assist in the measurement of grant-date fair value of equity-based compensation across a variety of industries.

Call us – we would like to work with you to find the optimal equity compensation structure and provide a reliable opinion regarding grant date fair value.

Related Links

• 8 Things You Need to Know About Section 409A
• People Are Worried about Equity Compensation
• Equity-Based Compensation: Tax Considerations
• Look Before You Leap: Evaluating a Section 83(b) Election
• Corporate Taxes, Other Pro-Growth Policies, and Business Value – A Brave New World?
• Noncompete Agreements for Section 280G Compliance