Executive compensation is on the top of every list of hot button tax issues, and has been for more than a decade.
+ Rules enacted in the wake of the Worldcom and Enron collapses, set forth in Section 409A of the Internal Revenue Code, were designed to prevent the abuses that came to light in the unraveling and fallout of these companies. Nevertheless, those rules can cause complex compliance and contractual issues for private, closely held companies. They will potentially apply any time an employee or independent contractor receives any form of compensation after the year in which the services were performed, i.e., “deferred compensation”. Even a simple performance bonus, which is paid after the end of the year, so that it can be calculated accurately, can run afoul of these rules; and failure to comply can result in substantial penalties being imposed on the employee or independent contractor.
+ The term “carried interest” has garnered even more attention—most recently in the context of fee waivers by investment advisers. The result is that many people believe, incorrectly, that those issues affect only private equity and hedge fund managers. While that has been the focus of much of the popular press, in fact, virtually every real estate investment entity, whether partnership, limited partnership or limited liability company, also has some sort of “carried interest”—although, in real estate ventures, it is commonly referred to as a “profits interest”. For example, if the organizer of the real estate venture will receive a share of profits that is greater than the share of capital she contributed, then she has a “carried interest”.
+ Operating businesses, including service providers such as doctors, lawyer, architects, contractors, often seek to incentivize employees with a share of profits, whether from operations or sale. Similarly, we are regularly asked about the structure and consequences about transferring stock to employees. All of those arrangements are fraught with issues related to the “carried interest” and “deferred compensation” and must be structured with extraordinary care.
At CSBB we advise business owners and executive employee about executive compensation in all its forms, with a particular focus on the tax consequences of structuring these arrangements.