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.

Narendra Acharya focuses his practice on matters relating to US and international employee benefits and executive compensation — including global stock plans and pensions, as well as matters pertaining to pensions, executive compensation and employment issues in mergers and acquisitions. Mr. Acharya assists US and non-US companies – both publicly traded and private – in the design and implementation of employee stock plans. He has extensive experience advising clients on income tax, social security, payroll withholding and reporting, local corporate tax deduction, employment law, securities and other regulatory issues applicable to equity awards in numerous jurisdictions.
Anne Batter is a partner in Baker McKenzie's Tax Practice Group with 25 years of tax experience. She focuses her practice on the tax treatment of executive compensation and fringe benefits arrangements. She also handles excise tax matters, particularly those involving the air transportation excise tax. She previously served as an attorney in the Income Tax & Accounting Division of the IRS’s Office of Chief Counsel and as attorney-advisor with the US Tax Court.
Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.
Christopher G. Guldberg has been practicing in the employee benefits and executive compensation areas since 1992 and is a senior member of the Firm’s benefits practice. Mr. Guldberg advises on a wide range of benefits issues including design, implementation, operation and termination of tax-qualified retirement plans and welfare benefit plans. He assists with all aspects of regulatory compliance associated with employee benefit plans and regularly advises clients on ERISA's fiduciary and prohibited transactions provisions. He also has helped clients correct benefit plan defects through DOL and IRS voluntary correction programs and has assisted clients with negotiated settlements with regulatory authorities.
Sinead Kelly is a partner in Baker McKenzie's Compensation practice. She advises on US executive compensation and global equity and has practiced in the compensation field for over 13 years. Sinead advises US and non-US public and private companies on all aspects of equity compensation plans and arrangements, including plan design, administration, and global implementation, as well as compliance with federal and state corporate, securities and tax laws, stock exchange rules, accounting rules, and non-US tax and regulatory requirements. Sinead also advises on the drafting and administration of nonqualified deferred compensation arrangements, director compensation programs, severance arrangements, change in control plans, employment agreements, short and long-term bonus plans, and other executive compensation arrangements.
Maura Ann McBreen is a partner in the Firm’s Chicago office and has over 30 years' experience in executive compensation and employee benefits. Maura Ann focuses on executive compensation and employee benefits, especially with regard to single employer, multi-employer, and multinational benefits. She addresses operational and fiduciary issues as they arise under tax-qualified retirement plans, including employee stock ownership plans, and leads our global pensions practice. She designs deferred compensation and equity-based incentive compensation plans, advises on issues under Code Sections 162(m), 280G, 409A and 457A and negotiates executive employment agreements.