As you probably have read by now, President Trump is expected to sign the Tax Cuts and Jobs Act on January 3, 2018. The TCJA’s elimination of the performance-based compensation exception under Section 162(m) (and other expansions) will require many companies to determine almost immediately which of their plans and agreements are grandfathered under the Transition Rule, because their auditors will force them to adjust their deferred tax asset account by year-end to reflect payments that the company previously projected as deductible, but no longer will be deductible. This will be part of the overall adjustments to companies’ deferred tax asset accounts required by the TCJA’s changes, including the corporate tax rate reduction (which makes all future tax deductions less valuable).
The changes to 162(m) apply to companies’ tax years beginning on or after January 1, 2018. However, the TCJA provides an exception for compensation “provided pursuant to a written binding contract which was in effect on November 2, 2017, and which was not modified in any material respect on or after such date.” This would appear to allow deductions in 2018 for performance-based equity awards made in 2015, 2016, or 2017 (before November 2). An employment agreement with the CFO that promises a specific amount of compensation may be grandfathered. Benefits accrued as of November 2, under a SERP or other non-qualified deferred compensation plan, should be excluded (if not materially modified after that date). However, other situations are less clear.
We hope to receive some early guidance from the IRS on the application of the transition rule, but no one knows for sure.