The National Association of Stock Plan Professionals. Obama, Romney or? Planning Strategies for Equity Compensation Pending Changes in the Code

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1 The National Association of Stock Plan Professionals Obama, Romney or? Planning Strategies for Equity Compensation Pending Changes in the Code Robert B. Webb, III Michael G. Meissner Matthew A. Secrist 37 Offices in 18 Countries Tuesday, August 21, 2012

2 SQUIRE SANDERS - OVERVIEW Squire Sanders is one of the most geographically diverse legal practices in the world; our global breadth and local depth serve our clients across the globe from 37 offices on 5 continents. We also have strong working relationships with independent firms in the Middle East as well as in the Squire Sanders Legal Counsel Worldwide Network, which includes independent firms across Latin America. Squire Sanders has approximately 1,300 lawyers in 37 offices and 18 countries around the world. With one of the strongest integrated global platforms and our longstanding "one-firm firm" philosophy, Squire Sanders provides seamless legal counsel worldwide. By the Numbers Top-20 global legal practice based on number of lawyers In 18 countries, 9th broadest global footprint Practicing law in more than 140 jurisdictions, in more than 40 languages Asia Pacific: 6 offices, lawyers Europe/Middle East: 15 offices, lawyers United States/Latin America: 16 offices, lawyers 2

3 Today s Speakers Bob Webb Robert B. Webb III, Partner Education University of Virginia, J.D., 1981 University of Virginia, M.B.A., 1981 University of Virginia, B.A., with distinction, 1977 Bob Webb is a corporate lawyer with extensive experience providing counsel to commercial enterprises and handling business and financial transactions. Bob has represented a wide array of businesses over the course of his career including technology, government contractor, real estate and healthcare companies. He currently devotes a significant part of his practice to information technology and government contracting related businesses. Bob also has significant experience in transactional and finance work relating to the professional and technical services, real estate and healthcare industries. He has been listed in the corporate section of The Best Lawyers in America for more than 10 years and was named a Washington DC Super Lawyer and a Virginia Super Lawyer in respective Law & Politics magazine surveys. Bob handles corporate and partnership transactions, tax and business advice, mergers and acquisitions, entity formation, joint ventures and teaming arrangements, venture capital and private equity transactions, lending transactions, business ownership and control disputes, transaction structuring, and public and private securities offerings. He also advises clients on the implementation of employee ownership stock, option, and equity-based compensation programs; structuring employment, compensation and retention agreements for highly compensated executives; and structuring buy-sell shareholder agreements for close corporations. 3

4 Today s Speakers Michael Meissner Michael G. Meissner, Partner Education Harvard University, J.D., cum laude, board of editors, Harvard Law Review, 1979 University of Notre Dame, B.A., cum laude, 1976 Michael Meissner s practice focuses primarily on the area of corporate federal income tax, with an emphasis on mergers and acquisitions, executive compensation and financial instruments. Michael also has significant experience representing tax exempt organizations as well as extensive experience in structuring corporate transactions including the representation of corporate clients before the Appeals Office and National Office of the IRS. Michael is listed in Who s Who in American Law and has been listed in The Best Lawyers in America for more than 10 years. He has also been listed by Thomson Reuters as an Ohio Super Lawyer each year since Michael is a regular presenter at the Cleveland Tax Institute and spoke in 2010 on Current Trends and Developments in Executive Compensation. He also co-authored an article in the Spring 2011 issue of Journal of Taxation of Investments 2010 Tax Relief Act Equity Capital Opportunities for Small Business. He is a member and former chair of the Cleveland Metropolitan Bar Association s General Taxation Committee and former general chair of the Cleveland Tax Institute. Michael is also a member of the American Bar Association. He is a trustee of the Cleveland Council on World Affairs and a member of its Executive Committee, as well as a trustee of the Eleanor B. Rainey Memorial Institute. Michael is a former trustee of the Tax Club of Cleveland and a member of the Tax Practitioners of Cleveland. 4

5 Today s Speakers Matthew A. Secrist Matthew A. Secrist, Associate Education Cleveland State University, J.D., magna cum laude, 2007 Cleveland State University, M.B.A., 2007 Robert Morris University, B.S.B.A., cum laude, 2003 Matthew Secrist focuses his practice on employee benefits and executive compensation matters. He has experience in a wide range of employee benefits matters, including tax qualified retirement plans, nonqualified deferred compensation plans and arrangements, welfare benefit plans, and COBRA, HIPAA and Patient Protection and Affordable Care Act issues. He also advises clients regarding compliance with Code Sections 162(m) and 409A. His executive compensation experience includes employee fringe benefit plans, stock option plans, supplemental executive retirement plans (SERPs), employment agreements and severance plans. Matthew also has experience in advising tax-exempt entities from formation to termination, as well as representing clients in controversy proceedings before the IRS and Department of Labor. Matthew is a member of the Cleveland Metropolitan and American Bar Associations. 5

6 Overview of Presentation Overview of Tax Provisions Set to Expire New Tax Provisions in 2013 Obama Tax Proposals Romney Tax Proposals Other Proposals Impact on Incentive Stock Options Impact on Non-qualified Stock Options Impact on Other Executive and Deferred Compensation Plans Tax Strategies Non-tax Factors to Consider 6

7 Overview of Tax Provisions Set to Expire Increase in ordinary income tax rates. Rates are as follows: 2012 Ordinary Income Tax Rates 35% 39.6% 33% 36% 28% 31% 25% 28% 2013 Ordinary Income Tax Rates Increase in capital gain tax rates. Rates are as follows: 2012 Dividend and Capital Gain Tax Rates 15% 20% 2013 Capital Gain Tax Rates 7 Starting in 2013, dividend income would be subject to ordinary income tax rates. Payroll tax holiday set to expire. This means employee s social security tax rate will return to 6.2% from the temporarily reduced rate of 4.2%.

8 New Tax Provisions in % hospital insurance (HI) tax applies under Code Section 3101(b)(2) to wages received with respect to employment in excess of: $250,000 for joint returns; $125,000 for married filing separately; and $200,000 for single. 3.8% Medicare tax for high-income individuals under Code Section In general, the tax is imposed on the lesser of: (i) net investment income for the year or (ii) the excess of modified adjusted gross income for the year over the following income levels: $250,000 for joint returns; $125,000 for married filing separately; and $200,000 for single. Net investment income is generally interest, dividends, annuities, royalties, rents, most capital gains, and income from passive activities minus allowable deductions for such items. 8

9 Obama Tax Proposals The top two income tax rates would increase from 33% to 36% and from 35% to 39.6%, and 2012 rates would stay the same for all others. Tax rates on capital gains and dividends for high-income households would increase from 15% to 20%. Adjust Alternative Minimum Tax for inflation. Buffet Rule. No household making more than $1 million a year pays less than 30% of their income in taxes. 9

10 Romney Tax Proposals Make permanent, across-the-board 20% cut in marginal rates. This would make the top rate 25% and the bottom rate 8%. Maintain current tax rates on interest, dividends, and capital gains. Eliminate taxes on interest, dividends, and capital gains for married taxpayers with AGI below $200,000 ($100,000 for single). Repeal the Alternative Minimum Tax. 10

11 Other Proposals Congressmen Ryan: Two income tax rates 10% for income up to $100,000 for joint filers ($50,000 for single) 25% on income above these amounts Eliminate most tax deductions, credits and exclusions but increase the standard deduction and personal exemption amounts. Shift from a worldwide system of taxation to a territorial tax system. Repeal the Alternative Minimum Tax. 11

12 Other Proposals Senator Levin Eliminate favored tax treatment of corporate stock option deductions Corporations are currently allowed to deduct a higher stock option compensation expense on their tax returns than shown on their financial books. Allow corporations to deduct stock option compensation on their tax returns in the same year it is recorded on the company books. Make corporate stock option deductions subject to the existing $1 million cap. Ensure research tax credits use the same methodology for calculating stock option compensation expenses. Make no change to stock option compensation rules for individuals or for incentive stock options used by start-up companies and small businesses. 12

13 Impact on Incentive Stock Options If the shares are sold prior to satisfying the required holding period (two years from grant, one year from exercise), then taxed at ordinary tax rates. If holding period rules are satisfied, the disposition of shares is taxed at capital gains rate. Impact of new HI and Medicare taxes along with other tax increases. Romney repeal of AMT would increase attractiveness of ISOs. 13

14 Impact on Non-qualified Stock Options If no ascertainable value at grant, then taxed as ordinary income at exercise. Impact of new HI and Medicare taxes along with other tax increases. 14

15 Impact on Other Executive and Deferred Compensation Plans Currently, standard supplemental wage withholding rates are 35% for supplemental wages over $1 million and 25% for below $1 million. Supplemental wages are all wages paid by an employer that are not regular wages. Examples include: income recognized on the exercise of a nonstatutory stock options, bonuses, back pay, commissions, wages paid under reimbursement or other expense allowance arrangements, nonqualified deferred compensation includible in wages, wages paid as noncash fringe benefits, and wage income recognized on the lapse of a restriction on restricted property transferred from an employer to an employee. If tax rates go up, supplemental withholding rates will rise to 39.6% for over $1 million and 28% for below $1 million. Ask employers to pay 2013 bonuses in 2012 be wary of IRC 409A. 15

16 Tax Strategies Exercising stock options and generating ordinary income. If incentive stock options were previously exercised and the shares have been held long enough for the sale to be a qualifying disposition, a sale of the shares in 2012 is subject to 15% capital gain rate, and would avoid additional capital gain taxes and additional Medicare tax in Restricted stock acceleration. 16

17 Non-tax Factors to Consider Whether selling stock now sacrifices future gains in stock value. What will the amounts received for the sale of stock be invested in and do those investments offer a similar return. Other non-tax factors. 17

18 Questions 18 To best facilitate questions and avoid multiple voice overlaps, please them to or, if you are logged into the webinar, use the chat message function to type a message - the moderator will then read the question so that all may hear it.

19 Contact Information Squire Sanders (US) LLP Michael G. Meissner 4900 Key Tower 127 Public Square Cleveland, Ohio (216) (office) Robert B. Webb, III 8000 Towers Crescent Drive, 14th Floor Tysons Corner, Virginia (703) (office) Matthew A. Secrist 4900 Key Tower 127 Public Square Cleveland, Ohio (216) (office) 19