December 17, 2017

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Startups Have Much To Be Thankful For – Senate Amendments to New Tax Bill Remove Deferred Compensation and Stock Options from Endangered Species List

As discussed in our November 14, 2017 blog post, Thanksgiving Tax Frenzy – New Tax Bill Proposes Executive Compensation Changes That Could Derail Deferred Compensation and Stock Options, the evolution of the Tax Cuts and Jobs Act bill in both the House and the Senate is very fluid. No sooner had we posted the previous entry when the Senate had modified its Chairman’s Mark on November 14, 2017. Start-ups and other entities granting executive compensation will have much to be thankful for because of this latest markup. This update reflects the state of the tax bills through November 15, 2017.

In addition to striking certain provisions relating to the tax treatment of deferred compensation (likely due to the public outcry against those provisions), the modification to the Chairman’s Mark adds a new provision that would defer the inclusion of income for income attributable to qualified stock transfers from employers.

Under the previous iteration of the Senate’s markup of the Tax Cuts and Jobs Act, the Senate included a provision which stated that compensation provided under a nonqualified deferred compensation plan, including equity compensation awards (e.g., stock options and the like) would be includible in the service provider’s taxable income when there was no substantial risk of forfeiture of the service provider’s rights to such compensation, or in other words, upon vesting. As previously noted, this would have the impact of effectively eliminating deferred compensation altogether. The House’s bill had initially included a similar provision, but the House, likely in response to considerable public pressure to remove such language, struck it from their amended version. The Senate similarly struck this provision from the Chairman’s Mark so that its version lines up with the House’s version of the bill. Thus, the laws regarding deferred compensation will remain in their current form, which is that deferred compensation will be taxed when paid, and stock options will be taxed when exercised.

In addition to striking the deferred compensation provisions, the Senate included a new proposal regarding the treatment of qualified equity grants, which largely follows the House’s bill on the subject (see our November 14, 2017 blog post on this). Namely, employees of nonpublic companies who are granted stock options would be able to defer recognition of gain for up to 5 years. However, this provision would exclude certain executives from obtaining such deferral, and would require that the corporation have a written plan under which at least 80% of all employees providing services to the corporation are granted similar stock options.

We will continue to monitor the status of these provisions as further amendments and changes come down the pike. It should also be noted that on November 16, 2017, the House voted on its version of the bill which passed with a vote of 227 to 205.

Copyright © 2017, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Gregory Schick, Tax and Employee Benefits Legal Specialist, Sheppard Mullin
Partner

Gregory C. Schick is a partner in the Tax, Employee Benefits and Estate Planning Practice Group in the firm's San Francisco and Palo Alto offices.

Areas of Practice

Gregory Schick's practice focuses primarily in the executive compensation, tax and corporate securities laws, and corporate governance areas.

Mr. Schick advises both publicly traded and privately held companies as well as individual clients. He negotiates, prepares and reviews equity compensation and change of control plans/agreements, Rule 10b5-1 trading plans along with proxy statements,...

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