US Tax Reform: Tax Cuts and Jobs Act Expected to Come Into Effect in 2018

As of December 20, 2017, both the House of Representatives and the Senate have voted to approve the final version of the Tax Cuts and Jobs Act, in substantially the form released by the Conference Committee on December 15th. The bill is expected to be presented to the President for signature before Christmas, making US tax reform a reality for 2018.

  • For public companies, the most significant change is with respect to Code Section 162(m), in particular the elimination of the performance-based compensation exception to the $1,000,000 deduction limit on compensation paid to covered executives. Notably, the transition relief – for compensation pursuant to a binding written contract in effect on November 2, 2017 – appears more limited than hoped for, calling into question whether it will apply to existing arrangements that include “negative discretion” to reduce the amounts payable or an ability to materially amend or terminate the arrangement (other than prospectively).
  • For private companies, the introduction of a new income tax deferral regime for options and RSUs relating to “qualified stock” will require some attention in 2018. To the extent companies design their option or RSU programs to meet the requirements of this new law, they will need to provide a prescribed notice to employees regarding their eligibility to make an election to defer payment of income tax relating to the awards.

The final bill includes other changes regarding the exclusion from income of certain fringe benefits and the deductibility of certain compensation-related expenses, but fortunately, does not change the taxation of “nonqualified deferred compensation” to vesting or introduce new FIFO rules for calculating capital gains taxes on sale of shares.

For a full discussion of how the bill impacts compensation and benefits arrangements maintained by both public and private companies, see our December 20, 2017 client alert.