Tax Cuts and Jobs Act passes in Senate

The U.S. Senate over the weekend passed its version of the Tax Cuts and Jobs Act, whose executive compensation provisions align closely to the corresponding bill passed by the House last month.

On Dec. 2, the Senate passed its version of the Tax Cuts and Jobs Act by a vote of 51 – 49.

Like provisions in the proposed House bill, both the current House and Senate bills keep intact limitations on deductible compensation paid to certain public company executive officers under Section 162(m) by:

Repealing exceptions for qualified performance-based compensation and commissions, rendering all compensation paid to a covered employee of more than $1 million per year nondeductible;

Expanding the current definition of “covered employees” to include the principal financial officer, and to provide for continued application for all years in which a covered employee receives any compensation from the company; and

Expanding the scope of “applicable employers” to cover companies subject to Section 162(m) that have publicly traded debt instruments.

Different from the House bill, however, the Senate bill provides that the changes concerning Section 162(m) will not apply to compensation under a written binding contract in effect on Nov. 2, 2017 that is not materially modified after such date.

“Companies should give serious consideration to the impact of the changes under Section 162(m) of the Internal Revenue Code (Code), as this is one area of legislation in which the House and Senate bills are aligned,” an earlier client alert from law firm Skadden stated.

Compliance relief could come in the form of deferred compensation. Current House and Senate versions removed proposed Section 409b, keeping in place the current tax treatment of non-qualified deferred compensation, including Code Sections 409A, 457A and 457(f).

“This comes as a big sigh of relief for many, as companies would otherwise have had to undertake a complete overhaul of their deferred compensation programs—including equity award grants, non-qualified retirement plans and severance arrangements—to comply with the changes to the timing of taxation that were proposed by the original versions of the bills and that were subsequently deleted,” Skadden stated.

Current versions of the House and Senate bills also preserve the implementation of an employer excise tax on tax-exempt organizations that provide certain highly compensated employees with compensation of more than US$1 million per year, or “excess parachute payments.”

BEAT provision

Aside from executive compensation matters, one obscure provision in the Senate bill has the renewable trade industry up in arms. At issue is the Base Erosion Anti-Abuse Tax (BEAT) provision, buried in the current Senate bill.

Large companies with foreign operations in the past have reduced their U.S. taxes through cross-border payments they can then deduct in the United States. The BEAT provision aims to circumvent “earnings strippings,” by requiring a minimum tax of 10% of taxable income. It would also make tax credits—such as the renewable electricity Production Tax Credit (PTC) and the Investment Tax Credit (ITC) for solar projects--more difficult to monetize .

In a Nov. 29 letter to the Senate, several clean energy organizations—including American Council on Renewable Energy (ACORE), the American Wind Energy Association, and Citizens for Responsible Energy Solutions—said the BEAT program, as currently drafted, “would have a devastating impact on renewable energy investment and deployment.”

“If this bill passes as drafted major financial institutions would no longer participate in tax equity financing, which is the principal mechanism for monetizing credits,” ACORE CEO Gregory Wetstone stated in the letter. “Almost overnight, you would see a devastating reduction in wind and solar energy investment and development.”

Keith Martin, a partner at law firm Norton Rose Fulbright, wrote in a blog post that, “the way the tax is calculated could claw back tax credits that U.S. companies were awarded for investing in renewable energy projects in the past.”

“It would also make it harder for banks and other large companies that are the principal source of tax equity for renewable energy to know, when closing on tax equity investments, whether they will receive the tax credits on offer for making the investments,” Martin wrote. “They would have to do a calculation at the end of each year to determine what tax credits they will be allowed to claim during the year.”

Following Senate passage of the current bill, clean energy organizations released a joint statement, further expressing their concern: “If these provisions are retained, they will result in broad instability and uncertainty for businesses and investors across many sectors, including the clean-energy sector. We look forward to working with conferees to address these concerns so that the sector can continue to contribute to vibrant and diverse domestic energy production.”

Unless the House approves the Senate bill in its entirety, a conference committee of House and Senate members will meet to reconcile the differences, after which time the House and Senate will vote on the committee’s conference report. In the Senate, a majority vote is required for passage. Provided the conference report passes both the House and Senate, it will then proceed to the President for his signature.