Equity Compensation Rules Continue to Change in Latest Proposed Tax Reform Bill

by Fenwick & West LLP
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The tax reform bill passed by the Senate early Saturday morning, December 2, in a 51-49 vote contained a number of last-minute amendments which, among other things, continue to leave key equity compensation rules in flux. Representatives from both chambers of Congress are scheduled to enter into conference this week to reconcile differences between the Senate and House Bills. Following is a brief look at where things stand on the Alternative Minimum Tax (AMT) and 162(m) transition rules.

Senate Bill Revives the AMT

In a significant divergence from the House Bill, the Senate Bill now retains the AMT, which was initially slated for repeal by both chambers. Under current law, employees subject to the AMT incur tax on the exercise of their incentive stock options and lose the benefit of deferred taxation until sale of the underlying shares otherwise permitted under Section 422 of the Internal Revenue Code. Repeal of the AMT would have eliminated one of the concerns of private company employees upon exercise of incentive stock options. Although the Senate and House Bills continue to maintain proposals providing limited ability for “qualified employees” of private companies to defer tax on certain equity grants for up to five years, deletion of the AMT repeal would limit the liquidity alternatives available to private company employees.

162(m) Transition Rules

As anticipated, the Senate Bill largely aligns with the House Bill in its proposed repeal of exceptions for qualified performance-based compensation (including stock options) currently applied to the $1 million annual limit on the deductibility of executive compensation for public companies under 162(m) of the Code. The Senate Bill adds a transition rule that would exempt performance-based compensation under a written contract in effect as of November 2, 2017, provided that the contract is not subsequently materially modified. Although earlier versions of the Senate Bill required the compensation to have been vested as of December 31, 2016, to qualify for the exemption, that limitation was not included in the final bill.

Read our earlier analysis in “Proposed Tax Reform Bill as Amended Stands to Significantly Impact Equity and Performance-Based Compensation” for more details.​​

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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