ACCOUNTING FOR INCOME TAXES SECTION 162(m) May 9, 2018

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2 ACCOUNTING FOR INCOME TAXES SECTION 162(m) May 9, 2018

3 ASC 740 SECTION 162(m) Pre-Tax Reform

4 ASC Section 162(m) Pre-Tax Reform Overview of Section 162(m) Limited compensation for covered employees - named executive office Officers included PEO, PFO, next three highest paid Limited to $1,000,000 in compensation Includes all compensation Cash payment Equity awards Benefits 4

5 ASC Section 162(m) Pre-Tax Reform Excluded compensation Bonus, if performance-based Equity compensation, if performance-based Other performance based compensation Compensation based on commissions PFO compensation 5

6 ASC Section 162(m) Pre-Tax Reform ASC 740 Accounting Deferred Taxes established for: Bonus accrual, performance-based Equity compensation, performance-based Deferred compensation Permanent items Non-performance-based compensation in excess of $1,000,000 Windfall or shortfall of equity compensation 6

7 ASC 740 SECTION 162(m) Post Tax Reform

8 What Changed? Removal of the commissions and performancebased pay exceptions. Many companies had designed their plans to meet these exceptions such that the $1 million cap never actually applied and all compensation adjustments were temporary. The removal of these exceptions makes the $1 million basically a hard cap The CFO is returned to the group of covered employees 8

9 What Changed? (Continued) Once an executive is a covered employee in any year (starting Jan. 1, 2017 and after), they are always a covered employee and compensation will be subject to section 162(m) in all future years, including after termination. This rule also extends covered employee status whether or not the individuals had proxy statement requirements in events in which proxy statements would have otherwise been required. This will affect covered employees who stay on the board as directors or who switch to independent contractor status and will change the effects in mergers and acquisitions since the last day of the tax year is essentially no longer relevant 9

10 What Changed? (Continued) Section 162(m) will now also apply to companies with only debt securities registered with the SEC. To understand whether 162(m) applies to additional clients, ask the client to represent to us whether it is required to file under section 15(d) of the Securities Act 10

11 Effect of Tax Reform on ASC 740 Increases the permanent items and reduces the deferred amounts Increases time spent determining deductible versus non-deductible amounts Increases the number of covered employees to be tracked Increased the number of companies that are subject to section 162(m) 11

12 Grandfather Provision (1) is provided pursuant to a written binding contract which was in effect on Nov. 2, 2017; and (2) a written binding contract was not modified in any material respect on or after Nov. 2,

13 Section 162(m) Post Tax Reform Written Contract Compensation paid pursuant to a plan qualifies for this exception provided that the right to participate in the plan is part of a written binding contract with the covered employee in effect on Nov. 2, The fact that a plan was in existence on Nov. 2, 2017 is not by itself sufficient to qualify the plan for the exception for binding written contracts The exception does not apply to new contracts entered into or renewed on or after Nov. 2, A contract that is terminable or cancelable unconditionally at will by either party to the contract without the consent of the other, or by both parties to the contract, is treated as a new contract entered into on the date any such termination or cancellation, if made, would be effective However, a contract is not treated as so terminable or cancelable if it can be terminated or cancelled only by terminating the employment relationship of the covered employee 13

14 Section 162(m) Post Tax Reform Material Modification The exception for remuneration paid pursuant to a binding written contract ceases to apply to amounts paid after there has been a material modification to the terms of the contract. Material modification has not been defined for purposes of the new rule; however, Reg. section (f) does currently have a definition for entities that become subject to section 162(m) for the first time, and in the absence of additional guidance, it appears appropriate to use this definition. Most importantly, any changes to compensation agreements on or after Nov. 2, 2017 need to be carefully considered. 14

15 Equity Compensation Virtually all equity compensation (stock options, restricted stock, restricted stock units) provided to employees via individual grant agreements that reference a larger umbrella incentive compensation or equity compensation plan. Once those grants are provided to employees, there generally is no employer discretion to take back the awards if the conditions set forth in the agreement are met. 15

16 Effect of Tax Reform on ASC 740 Increase review of equity compensation awards Separate the equity compensation into Pre and Post Reforms Review of existing arrangements to qualify for grandfathering provision 16

17 Incentive Compensation (Bonus) Most companies designed their bonuses to meet the performance-based pay exception in previous years, which means there is an overall bonus plan (perhaps part of a larger incentive compensation plan document) that was approved by shareholders and under which the compensation committee sets targets on some periodic basis (annual or other). Although these targets must be set within the first 90 days of the performance period, many employers state the targets as maximums and retain discretion to pay something less or nothing at all, even if the targets are met. Thus, bonuses will require much more analysis to determine whether they can continue to be excepted from the $1 million limitation in 2018 and future years 17

18 Effect of Tax Reform on ASC 740 Increase review of incentive compensation arrangements Review of existing rewards to qualify for grandfathering provision 18

19 Deferred Compensation Arrangements Many non-qualified deferred compensation plans that are considered a written binding contract as of Nov. 2, 2017 will be excepted under the grandfathering rule unless they are materially modified or renewed. As with bonuses, the determination will be dependent upon the employer s discretion remaining so analysis will be necessary. 19

20 Effect of Tax Reform on ASC 740 Increase review/analysis of deferred compensation arrangements Separate deferred compensation amounts between pre and post reform May need to separate deferred compensation amounts between covered employee and noncovered employee 20

21 Non-Qualified Retirement Plans If an employee remains a covered individual post-termination or in retirement under the new rules, supplemental executive retirement plans (SERPs) that are non-qualified deferred compensation plans offering executives annuities or other formula-driven or fixed payments after separation will be grandfathered if they were in writing before Nov. 2, The employer can retain the right to freeze (or terminate) future benefits for services that have not yet been provided without removing the plan from grandfathered status, but the employer cannot have full rights to materially amend or terminate the plan or any discretion in paying the amount determined under the plan. Thus, retirement payments will need to follow a similar review and analysis as other payments described above to determine whether they will be excepted from the $1 million limit even though the individual remains covered 21

22 Fiscal Year Taxpayers Provisions of the Tax Reform apply to years beginning after December 31, 2017 Provision for employment contracts apply as of November 2,

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