DISCLOSURE DRAFTING TIPS
Welcome to my disclosure drafting tips! I hope to use this page to highlight some common errors that I find as I read annual reports, proxy statements, Forms ADV (or is that Form ADVs?), and other disclosure documents. The names have been changed to protect the innocent, but I promise: every “before” that you see here is real.
If your company has any particularly gnarly disclosure paragraphs that you want me to tackle, please send them along!
Does the Tax Cuts and Jobs Act still matter?
Generally, the Company is entitled to a deduction for federal income tax purposes equal to the amount of any ordinary income the Participant recognizes; however, section 162(m) of the Code generally disallows a public Company’s tax deduction for compensation in excess of $1 million paid in any taxable year to a Covered Employee (as defined in the Code).
Beginning in tax year 2018, the Tax Cuts and Jobs Act (“Tax Reform”) significantly modified Section 162(m) of the Code by eliminating the “qualified performance-based compensation” exception to the deductibility limitation under Section 162(m). Since then, the Compensation Committee has considered and continues to consider the impact of the Tax Reform on the design of the Company’s executive compensation, including potential grants under the Amended Stock Plan. However, the Compensation Committee considers a variety of factors in making decisions for the Company’s executive compensation, including the Company’s tax position, the materiality of the payments and tax deductions involved, plan design, the timing of the vesting of compensation awards, and the exercise of previously granted rights. After considering various factors, the Compensation Committee may decide to authorize grants, all or part of which may be nondeductible under Section 162(m) of the Code. The Compensation Committee may grant awards such as time-based restricted stock awards and/or enter into compensation arrangements under which payments are not deductible under Section 162(m) if the Compensation Committee determines that such non-deductible arrangements are otherwise in the best interests of our stockholders.
I am not going to rewrite this section. Instead, I’m going to ask you to consider whether the Tax Cuts and Jobs Act is at all relevant to your company in 2022. I’m willing to bet it isn’t, so I’m offering examples from several companies that have done a good job of streamlining their compensation-related tax disclosure.
Accounting and Tax Implications of Our Compensation Policies
In designing our compensation programs, the Compensation Committee considers the financial, accounting and tax consequences to Intuit as well as the tax consequences to our employees. In determining the aggregate number and mix of equity grants in any fiscal year, the Compensation Committee and management consider the size and share-based compensation expense of the outstanding and new equity awards relative to our one- and three-year operating plans and relative to market capitalization.
While the Committee considers the deductibility of awards as one factor in determining executive compensation, the Committee also looks at other factors in making its decisions and retains the flexibility to award compensation that it determines to be consistent with the goals of our executive compensation program even if the awards are not deductible by us for tax purposes.
In addition to considering the tax consequences, the Committee considers the accounting consequences of its decisions, including the impact of expenses being recognized in connection with equity-based awards, in determining the size and form of different equity-based awards.
[New Jersey Resources]
United States Federal Income Tax Limits on Deductibility
Section 162(m) of the Internal Revenue Code generally sets a limit of $1 million on the amount of compensation that we may deduct for federal income tax purposes in any given year with respect to the compensation of each of our named executive officers. We consider the impact of this deduction limit when developing and implementing our executive compensation programs, but we intend to design our executive compensation arrangements to be consistent with our best interests and the interests of our shareowners. We believe it is important to preserve flexibility in administering compensation programs to promote various corporate goals. Accordingly, we have not adopted a policy that all compensation must be deductible under Section 162(m). Amounts paid under our compensation programs may not be deductible.