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With tax reform potentially effective in 2018, companies may wish to accelerate their deductions for compensation-related liabilities into the current year. Alvarez and Marsal, Taxand USA, shares their recommendations.
If corporate tax rates are cut in the coming year, as proposed by the House of Representatives, the value of the deduction for business expenses, including the deduction for compensation expense recognised under an annual or long-term incentive compensation plan, would be reduced.Accelerating the payment or accrual of compensation related liabilities would allow a corporation to capture a more valuable deduction.
Accelerating Annual Incentives
For annual incentives, taking a deduction in 2017 for amounts to be paid in 2018 may require some additional planning before year’s end. Most businesses pay bonus or annual incentive plan payments in the first quarter of the year following performance, requiring employees to be employed on the payment date to avoid forfeiting the payment. Because the forfeiture provision means that the company’s liability is not fixed until all bonuses are paid, amounts paid under this plan design are not deductible until actually paid to employees.
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Corporations must understand the implications of the potential 2018 tax reform and react with foresight. Strategic tax planning is crucial. The A&M Compensation & Benefits team is here to assist you in developing and executing a tax strategy that maximises shareholder value. Please contact us if you are interested in exploring your options for accelerating compensation-related expense into the current year before 2017 comes to a close.