A client pointed out to me yesterday, that should Tax Reform pass on or before December 31, 2017, our DTA balances will all need to be adjusted.
A Quick Review
DTA stands for Deferred Tax Asset, the accounting way to anticipate the tax deduction your company will get when your non-qualified awards settle. As you already know, when NQs are exercised or when RSUs are released, your company receives a tax deduction in the US and potentially in some other jurisdictions as well. To anticipate this, your company takes the expense that you book for NQs, RSUs, and RSAs for the jurisdictions in which you are entitled to a tax deduction at settlement, multiplies that by your corporate tax rate and books that amount to DTA. This is why your tax group asks you for an expense report grouped by grant type and country. Then when the shares are exercised or release (or NQs expire), the DTA is reversed because you are no longer anticipating a tax deduction.
Private companies often do not book a DTA. Companies in a Net Operating Loss (NOL) position often skip this step as well.
What’s the Issue Again?
So, under Tax Reform, if the new tax rates don’t take effect until 2019, DTA balances will take on a new level of complexity, since we will have one corporate tax rate for shares we expect to vest and settle in 2018 and a different tax rate for those that will settle after 2019.
For those shares vesting in 2019 and beyond, this is an easy bifurcation when you do your regular DTA balance at the end of the year. Just designate those tranches with a formula in Excel and when you summarize the DTA on the books, summarize these tranches into a separate category. Multiply the 2018 amounts times your current corporate tax rate (often 40% ish). Multiple the 2019 amounts times the new tax rates (20%? 30%? TBD).
For those of you that still have a substantial number of options outstanding, it’s likely you will continue to use the current tax rate for your vested options, since it’s difficult to predict when they which settle and under which tax rate they will fall.
Dust off those spreadsheets, or talk to your vendor to make sure they are getting ready for this change!
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