By Anthony C. Ciriaco, Esq., Alan D. Duffy, Esq., Jennifer Bibart Dunsizer, Esq., and Yolanda C. Vorys, Esq.
Vorys, Sater, Seymour and Pease LLP , Columbus, OH
On January 1, 2011, the highest federal income tax rate is scheduled to increase from 35% to 39.6% when several temporary tax cuts expire. Congress may act to extend these tax cuts after the November elections, but the Obama administration opposes providing relief for "high earners."
Many companies are considering paying bonuses that normally would be paid in early 2011 by December 31, 2010 to ensure that employees receive the benefit of the current, lower tax rates. However, before making this payment, companies should ensure that early payment does not result in adverse tax consequences under §409A or result in a loss of deduction under §162(m).
Purely discretionary bonuses or incentive compensation that is payable by March 15, 2011 (for companies with fiscal years ending on December 31, 2010) may be paid at any time prior to December 31, 2010 without resulting in adverse tax consequences under §409A.
If bonuses normally are paid after March 15, 2011 (for companies with fiscal years ending on December 31, 2010), the bonuses are considered to be "deferred compensation" subject to §409A. Section 409A requires that deferred compensation be payable at an "objectively determinable and non-discretionary" time and prohibits payment from being made earlier than this time. If early payment is made, §409A imposes a 20% additional income tax, plus interest and penalties, on each employee receiving an early payment.
Bonuses paid by public companies that are intended to be deductible "performance-based compensation" under §162(m) are subject to special limitations. These limitations include a requirement that the compensation committee first certify that performance has been achieved before payment can be made.
Normally, a compensation committee's certification will be made in early 2011. However, if all or a portion of the required performance already has been achieved, the compensation committee may certify this level of performance allowing payment (or partial payment) to be made prior to January 1, 2011, while preserving the company's tax deduction.
For example, assume that a company maintains an annual bonus plan based on its net income for the period ending December 31, 2010. The projected payout, based on year-to-date performance and projected performance through December 31, 2010, is expected to be 90% of target. The compensation committee may certify the achievement of performance equal to 75% of target (leaving a significant cushion to protect against an unanticipated decrease in performance for the remainder of the period) allowing partial payment to be made by December 31, 2010. In early 2011, when the actual performance is determined, the compensation committee may make a second "true up" certification allowing the balance of the payment to be made.
For more information, in BNA's Tax Management Portfolios, see Brisendine, Veal, and Drigotas, 385 T.M., Deferred Compensation Arrangements, and in Tax Practice Series, see ¶5710, Nonqualified Deferred Compensation.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)