Tax Talks

The Proskauer Tax Blog

Tax Reform: Impact at the State Level

In a radio segment on Marketplace, partner David Miller comments on tax reform and the impact of the new $10,000 cap on the state income, property and sales tax that individuals can deduct. The segment also explores the loopholes and workarounds that states could implement to allow their residents to avoid this cap.

To listen to the segment, click here.

 

IRS Issues Limited Section 409A Relief to Pay Income Taxes on Pre-2009 Section 457A Deferrals

The Internal Revenue Service (the “IRS”) has issued Notice 2017-75 (the “Notice”), which provides certain limited relief from the strict requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), in order to pay income taxes on deferrals attributable to services performed before 2009 that are required to be included in gross income under Section 457A[1].

Section 457A

Section 457A generally provides that any compensation that is deferred under a “nonqualified deferred compensation plan” of a “nonqualified entity” is includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation. Under Section 457A, the term “nonqualified deferred compensation plan” generally includes any plan or arrangement pursuant to which a service provider has a legally binding right to compensation during a taxable year that is or may be payable to the service provider in a later taxable year. A “nonqualified entity” is generally defined as (i) any foreign corporation unless substantially all of its income (i.e., at least 80%) is (a) effectively connected with the conduct of a trade or business in the United States, or (b) subject to a comprehensive foreign income tax, or (ii) any partnership (domestic or foreign) unless substantially all of its income (i.e., at least 80%) is allocated to persons other than (a) foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax, and (b) tax exempt organizations.

Section 457A generally only applies to deferred amounts attributable to services performed after December 31, 2008.  Any deferred amounts attributable to services performed before January 1, 2009, to the extent not includible in gross income in a taxable year beginning before 2018, are required to be included in gross income in the later of (a) the last taxable year beginning before 2018, or (b) the taxable year in which there is no substantial risk of forfeiture of the rights to such compensation (“Pre-2009 457A Deferrals”).

Section 409A

Section 409A provides strict rules in regards to when amounts deferred under a Section 409A-covered nonqualified deferred compensation plan may be paid and requires the applicable plan document to include the applicable payment date or schedule.  Section 409A generally prohibits deviation from the applicable payment date or schedule by prohibiting the acceleration or further deferral of the time of payment.  Deferred amounts that were earned and vested prior to December 31, 2004 are generally grandfathered and not subject to Section 409A, unless the applicable plan is materially modified.

The Notice

In the Notice, the IRS states its intent to issue regulations providing that a Section 409A-covered plan will not fail to meet the requirements of Section 409A solely because payments of deferred amounts under the plan are accelerated in an otherwise impermissible manner in order to pay income taxes on Pre-2009 457A Deferrals that are required to be included in gross income under Section 457A.  The IRS also noted that such regulations will provide that any change in the time or form of payment of a Section 409A-grandfathered amount to pay such income taxes will not be considered a “material modification” of the applicable plan or arrangement that would otherwise forfeit the grandfathered treatment of amounts deferred under the plan.

The relief to be provided in the regulations will apply only to the extent that the amount accelerated is not more than an amount equal to the Federal, state, local and foreign income tax withholding that would have been remitted by an employer if there had been a payment of wages equal to the income includible under Section 457A.

The Notice makes clear that taxpayers may rely on the relief described therein until the regulations are finalized.

[1] All Section references herein are to the Code, unless otherwise noted.

House of Representatives and Senate Conferees Reach Agreement on the Tax Cuts and Jobs Act (H.R. 1): Description of the Conference Agreement and Differences from House and Senate Versions

On Friday, December 15, the U.S. House of Representative and Senate conferees reached agreement on the Tax Cuts and Jobs Act (H.R. 1) (the “Final Bill”), and released legislative text, an explanation, and the Joint Committee on Taxation estimated budget effects (commonly referred to as the “score”).  Next week the House and Senate are each expected to pass the bill, and it is expected to be sent to the President for signature the following week.  As the conferees actually signed the conference text, changes (even of a limited and/or technical nature) are extremely unlikely at this point.

The Final Bill largely follows the Senate bill, but with certain important differences.  We outline some of the most significant differences between the Final Bill, the earlier House bill, and the Senate bill.  We then discuss in detail some of the most significant provisions of the Final Bill.  The provisions discussed are generally proposed to apply to tax years beginning after December 31, 2017, subject to certain exceptions (only some of which are noted below).  While we discuss some of these provisions in detail, we do not address all restrictions, exclusions, and various other nuances applicable to any given provision. Continue Reading

To Accelerate or Not? Potential Tax Planning in Light of Proposed Reforms to Code Section 162(m)

Under both the House and Senate versions of the Tax Cuts and Jobs Act, Internal Revenue Code Section 162(m) would be modified to expand the scope of companies and executive officers subject to the limitation on deductibility of compensation over $1 million, as well as to eliminate the exception to non-deductibility under Section 162(m) for qualified performance-based compensation. The changes would be effective for tax years after 2017, but under the Senate bill, binding contracts in effect on November 2, 2017 would be grandfathered if not materially modified on or after that date).  Each version of the Tax Cuts and Jobs Act would also generally lower the corporate tax rate to 20%.  The House bill reduces the corporate tax rate beginning in 2018 and the Senate reduces it beginning in 2019.

Continue Reading

U.S. Senate Passes Its Version of the Tax Cuts and Jobs Act (H.R. 1); Descriptions of the Bills Passed in the House and Senate and Outstanding Differences to be Resolved in Conference

In the early hours of Saturday morning, the U.S. Senate passed the Tax Cuts and Jobs Act (H.R. 1) (the “Senate bill”), just over two weeks after the U.S. House of Representatives passed its own version of the same legislation (the “House bill”).  Members of the House and Senate will next convene in conference to attempt to reconcile the House and Senate versions of the legislation.  Identical versions of the bill must be passed by simple majorities in both the House and the Senate before the bill, and signed by President Trump, before such legislation will become law.

The final Senate bill, although similar to the bill passed by the Senate Finance Committee on November 16, contains several important changes.  We outline some of the most significant changes below, followed by a list of some of the major outstanding points of difference between the House and Senate bills as passed by the respective chambers.  We then discuss in detail some of the most significant provisions of both bills.

Continue Reading

Income, from Whatever Exchange, Mine, or Fork Derived: The Basics of U.S. Cryptocurrency Taxation

In this first of (we hope) many posts on the interesting and myriad tax issues arising in the world of cryptocurrency and blockchain technology, we focus on the very basic U.S. federal income tax consequences of cryptocurrency transactions.  The following is a very high-level discussion of the consequences generally applicable to U.S. individual holders of cryptocurrencies, and will not be applicable to all taxpayers depending on their particular situation.

Is it property or is it money?

While it might seem an academic question, the distinction between property and currency is the key to the U.S. federal income taxation of cryptocurrencies.  Gain on nonfunctional foreign currency exchanges (i.e., currencies other than the main currency used by a trade or business) is generally ordinary income, and therefore taxable under current law at marginal rates up to 39.6% (or 43.4%, factoring in the net investment income tax).  In contrast, gain or loss on the sale of property can constitute either ordinary or capital income, depending on whether the property sold is or is not a capital asset.  If a capital asset, the reduced long-term capital gains rate (up to 23.8% under current law, including the net investment income tax) could apply if the asset sold was held for more than one year.

Continue Reading

Comparison of the Executive Compensation Provisions in the Tax Cuts and Jobs Act

On December 2, 2017, the Senate approved its version of the Tax Cuts and Jobs Act, which contains proposals modifying certain executive compensation provisions of the Internal Revenue Code. The Senate’s approval of the executive compensation provisions follows substantively the same provisions proposed by the Senate Finance Committee’s bill, and the House of Representatives’ version of the Tax Cuts and Jobs Act (known as H.R. 1, released on November 2, 2017 and modified by the House Committee on Ways & Means (the “Ways & Means Committee”)).  Currently, both bills approved by the House and the Senate include proposals to (1) create a new Section 83(i) that will allow the deferral of income from certain qualified equity grants made by private corporations, (2) significantly expand the scope of the $1 million deductibility limitation on executive compensation described in Section 162(m) (including an elimination of the exceptions for performance-based compensation and commissions) and (3) create a new Section 4960 that subjects excess remuneration paid to certain employees of tax-exempt organizations to an additional 20% tax payable by the employer.  The presence of these proposals in both plans makes it more likely that they will appear in a final version of the Tax Cuts and Jobs Act, if approved by Congress.

The chart in the link below provides a comparison of bills adopted by the House and Senate bills: (1) H.R. 1 as reported by the Ways & Means Committee on November 10, 2017 and passed by the House on November 16, 2017 and (2) as approved by the Senate on December 2, 2017, based on the draft reported by the Senate Finance Committee on November 20, 2017, with substantively similar executive compensation provisions as the bill passed by the House.

Comparison Chart of the Executive Compensation Provisions in the Tax Cuts and Jobs Act

This summary does not describe all of the proposals in the Tax Cuts and Jobs Act.   As of the date of posting, the passage of the Tax Cuts and Jobs Act is uncertain.  Ultimate enactment will require the passage of identical bills by both the House and Senate, and the signature of the President. Reconciliation of the two bills as a whole will require negotiation between the two houses. As a result, the precise form that tax reform legislation will take, when ultimately enacted, remains uncertain. Republican leadership has stated that it plans to present legislation for the President’s approval before the end of 2017.  Therefore, taxpayers should consider the effects of the proposals in the bills now. Please feel free to contact any member of the Proskauer Employee Benefits & Executive Compensation Group with any questions about this post.

 

 

LexBlog