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December 12, 2017

With tax reform potentially effective in 2018, companies may wish to accelerate their deductions for compensation-related liabilities into the current year. If corporate tax rates are cut in the coming year, as proposed by the House of Representatives, the value of the deduction for business expenses, including the deduction for compensation expense recognized under an annual or long-term incentive compensation plan, would be reduced. Accelerating the payment or accrual of compensation related liabilities would allow a corporation to capture a more valuable deduction.

Accelerating Annual Incentives

For annual incentives, taking a deduction in 2017 for amounts to be paid in 2018 may require some additional planning before year’s end. Most businesses pay bonus or annual incentive plan payments in the first quarter of the year following performance, requiring employees to be employed on the payment date to avoid forfeiting the payment. Because the forfeiture provision means that the company’s liability is not fixed until all bonuses are paid, amounts paid under this plan design are not deductible until actually paid to employees.

It is possible to take a deduction in the current year for bonuses that will actually be paid in the succeeding year, provided certain requirements are met. First, the liability for bonuses must be fixed by year-end. Thus, the company must establish a “bonus pool” from which bonuses will be paid. Second, the total amount paid may not be contingent on any future event. Therefore, the full bonus pool must be paid out, and any bonus that is forfeited by a participant must be reallocated to other participants in the bonus plan. By amending bonus plans as necessary to accommodate this approach, and by taking the requisite corporate action to fix the bonus pool before year-end, bonuses to be paid in 2018 may be deducted in 2017. (Publicly traded companies should ensure that this approach will continue to satisfy the performance-based exception to the $1 million deduction limitation as applicable to their five highest-paid executives under Code Section 162(m).)

Accelerating Long-Term Incentives

Due to differences in the timing of expense recognition for tax and book purposes, stock-based compensation often creates a deferred tax asset or liability (DTA or DTL, respectively). The reduction in corporate tax rates will require corporations to adjust their DTAs and DTLs. As the lower rates decrease the amount of future taxes payable, DTAs become less valuable. Under ASC 718, any write-off of a DTA would flow through to the income statement, reducing net earnings.

With this in mind, companies may consider accelerating the vesting of stock awards into 2017. This would reverse the book/tax difference before the change in tax rates, eliminating the DTA, which could otherwise have a negative effect on earnings.

Alvarez & Marsal Taxand Says:

Corporations must understand the implications of the potential 2018 tax reform and react with foresight. Strategic tax planning is crucial. The A&M Compensation & Benefits team is here to assist you in developing and executing a tax strategy that maximizes shareholder value. Please contact us if you are interested in exploring your options for accelerating compensation-related expense into the current year before 2017 comes to a close.


The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisers. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisers before determining if any information contained herein remains applicable to their facts and circumstances.

About Alvarez & Marsal Taxand

Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisers who are free from audit-based conflicts of interest and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the United States and serves the United Kingdom from its base in London.

Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisers in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

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