As readers know, companies that pay more than $1 million in total compensation (cash, equity, etc.) to a “covered employee” (now including the CFO and former employees) in 2018 or later generally will not be able to deduct the amount over $1 million (subject to the transition rule). We previously suggested that companies and compensation committees consider how they can reduce the impact of the lost deduction for performance-based compensation for future cash and equity awards (see Tax Act Gives a Boost to Deferred Compensation Plans and SERPs).

Another action available to many companies is to award qualifying incentive stock options under Code Section 422 (ISOs). Generally, ISOs do not result in a tax deduction for the company, but they do provide favorable tax consequences for the employee recipients. As long as the company will not be able to deduct the gain on equity awards anyway, why not provide better tax treatment to the executives?

Of course, the many requirements that Code Section 422 applies to ISOs, including the limit on award date value of $100,000 vesting in any future tax year, will reduce their utility to many employers. And the difference between the market value and the exercise price of an ISO at exercise is subject to the Alternative Minimum Tax (AMT). Nonetheless, awarding ISOs is something to consider.