Michael Gray, CPA’s Option Alert #162

An irregular alert for issues relating to employee stock options

November 17, 2017

© 2017 by Michael Gray, CPA

ISSN 1931-2768

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Senate preserves nonqualified stock options

The Senate Finance Committee has released a modification to the Chairman’s Mark of the Tax Cuts and Jobs Act. It deleted a provision that would have, effective after December 31, 2017, accelerated the taxation of deferred compensation, including income relating to nonqualified stock options and stock appreciation rights, to the date there is no substantial risk of forfeiture of the rights to the compensation.

The House Ways and Means Committee also deleted a similar provision from its version of the bill.

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Senate adds transition rule for excessive compensation limit expansion proposal

Publicly traded corporations are limited to a tax deduction of $1 million per year for certain “covered employees.” Under the current tax laws, certain “performance based” compensation, including compensation relating to employee stock options, isn’t subject to the limit.

Under both the House and Senate tax reform proposals, the performance based compensation exception would be repealed, eliminating a significant tax deduction for companies like Ebay, Google, Apple, Oracle, and the Walt Disney Corporation.

Compensation paid to another individual, such as for inherited stock options or options given to a former spouse pursuant to a domestic relations order, would also be subject to the $1 million limitation for the employee.

The principal executive officer and the principal financial officer of a publicly held corporation would be added to the list of “covered employees.”

When an individual is a covered employee with respect to a corporation for a taxable year beginning after December 31, 2016, that individual would remain a covered employee for all future years.

The Senate has issued modifications to the Chairman’s Mark of the Tax Cuts and Jobs Bill. Under the transition rule, the proposed changes do not apply to any remuneration under a written binding contract which was in effect on November 2, 2017, and which was not modified after that date in any material respect, and to which the right of the covered employee was no longer subject to a substantial risk of forfeiture on or before December 31, 2016.

Remember this legislation is a work in progress and more changes will be negotiated.

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Consult with a tax advisor

For our readers who aren’t tax advisors, this newsletter is intended to alert you about tax issues that could affect you. It is not a substitute for advice from a professional tax advisor. You will find that getting advice from a qualified advisor is a worthwhile investment.

Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.

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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)