Prior to the effective date of the tax bill recently signed by the President, Section 164 of the Internal Revenue Code permitted individuals who itemized deductions to deduct state and local income and other designated taxes (SALT) in calculating their Federal taxable income. Congress amended Section 164 for years beginning after 2017 and prior to 2026 to limit SALT deductions to $10,000 per year and, as a practical matter, to sharply reduce the number of taxpayers who will be itemizing deductions and thus able to take advantage of even this limited deduction. By contrast, the new tax legislation does not restrict the ability of employers to deduct payroll taxes to which they are subject.
The Tax Cuts and Jobs Act makes some notable, though targeted, changes to the employee benefits landscape. We summarize some of the more significant changes in the Question and Answers set out below.
The Tax Cuts and Job Act of 2017 was recently signed into law creating two important changes in executive compensation, which we outline below.
The “intermediate sanctions” rules under Section 4958 of the Internal Revenue Code have long governed the payment of compensation to executives of public charities. While these rules are highly prescriptive, if followed, they offer taxpayers a significant advantage in the form or a rebuttable presumption of reasonableness. While there was concern among tax-exempts that the tax bill might reduce or even eliminate the presumption of reasonableness, that turned out not to be the case. But the final version of the legislation for the first time imposed a tax on certain excess compensation and excess parachute payments, which we discuss in more detail below.
Taking note of the #MeToo movement, Congress included a new provision in the tax code overhaul bill — Section 13307 – which is titled “Denial of Deduction for Settlements Subject to Nondisclosure Agreements Paid in Connection with Sexual Harassment or Sexual Abuse.” While the title of the section makes its purpose clear, the provision raises more questions than it answers.