2018 Homebuilder Tax Director Roundtable. Wynn Las Vegas 7-8 May 2018

Transcription

1 2018 Homebuilder Tax Director Roundtable Wynn Las Vegas 7-8 May

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2018 Ernst & Young LLP. All Rights Reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. 2

3 Section 162(m) discussion impact of Tax Cuts and Jobs Act and planning opportunities Rick Berge Ernst & Young LLP 3

4 Tax law changes: Section 162(m) 4

5 Tax law changes affect compensation and benefits The Tax Cuts and Jobs Act (TCJA) makes changes that: Expand the $1 million deduction limit for executive pay to public companies and other SEC filers. Limit employers tax deductions for certain compensation and benefits. Business needs will always drive compensation design based upon attracting, retaining and incentivizing employee talent. But tax law changes present an opportunity for a review. In addition to confirming compliance, a review of current programs may raise questions about whether there are more optimal compensation and benefit designs. 5

6 Section 162(m) $1m deduction limitation Section 162(m) limits the deductibility of compensation to $1 million for compensation paid by certain SEC filers to their covered employees. Pre-TCJA It applied only to companies with publicly traded common stock in the US and generally excluded foreign private issuers. TCJA It applies to any public issuer of publicly traded common stock, including foreign private issuers and others who are subject to certain SEC reporting, such as public debt issuers. Section 162(m) provided an exemption for qualified performance-based compensation and postemployment payments from the $1 million deduction limitation. The CFO was excluded from the definition of covered employee. The TCJA effectively eliminated the exemption for performancebased compensation and the exemption for post-employment pay (e.g., supplemental pensions and severance). The TCJA changed the definition such that now compensation paid to the CFO is subject to the $1 million deduction limitation. Covered employees are only those individuals reported on the proxy compensation disclosure and who remain employed on the last day of the tax year. Compensation under plans issued prior to becoming publicly held or disclosed in an IPO may be exempt from the deduction limit. Covered employee definition includes any individual who has previously been a covered employee, even after the individual no longer holds the position. New 162(m) changes apply unless amounts are paid under a written binding contract in effect on 2 November, 2017; IPO exceptions may still be in effect. 6

7 Implications under Section 162(m) Is the company newly subject to Section 162(m) under the expanded definition of a public issuer? What compensation grants and awards may continue to be deductible without limit under pre-tcja law because they constitute binding contracts or meet other exceptions? Any current or future covered employee of a company subject to the new definition of a public issuer Grants to a CFO Grants that continue to meet the pre-tcja performance-based compensation exception Grants designed to pay post-employment IPO planning, tax-qualified plans, individuals compensated by non-us entities What documentation does the company have to support its positions for tax and financial reporting? What systems are in place to track all covered employees and future payments that may include both deductible and nondeductible compensation? 7

8 Implications under Section 162(m) Does the elimination of the performance-based compensation regime free the company to change processes that were developed solely to meet that tax law exception? Pre-TCJA regulations under Section 162(m) imposed fairly rigid timing rules, generally precluded midyear changes in goals and governed the structure of compensation committees. Note that with respect to any binding contracts under performance-based plans, processes may need to be kept in place until those binding contracts are paid out. Has the company quantified the tax rate effect of the TCJA changes under Section 162(m)? Expected lower corporate rates reduce the effect of losing future tax deductions. However, the potential for a growing list of covered employees and the lack of any indexing on the $1 million limit will result in a growing permanent nondeductible amount. 8

9 Implications under Section 162(m) While broad solutions are limited, there may be facts and circumstances that present some mitigation opportunities; for example: Where senior executives perform services for both US and non-us subsidiaries, dual employment contracts and other employment changes may be viable. Where post-employment compensation is paid in lump sums, consider spreading future payouts to fall under $1 million per year (consistent with existing deferred compensation regulations allowing such changes). A shift away from options or appreciation rights to restricted stock or restricted stock units may provide more predictability and potential smoothing of the deduction limitation. Certain incentives remain outside the $1 million deduction limitation, including increased qualified plan benefits, certain life insurance and partnership interests that satisfy regulatory exceptions (i.e., profits interests). Cash balance plans provide current deductions with less volatility than historical defined benefit plans. A partnership interest allocates away partnership income that is the economic equivalent of a deduction. Real estate investment trust on top of operating partnership may provide opportunity. 9

10 Q&A 10

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