The document provides an overview and analysis of key provisions of the Tax Cuts and Jobs Act of 2017 relating to pass-through entities, including: (1) the new 20% deduction for qualified business income of pass-through entities, (2) changes to net operating losses and excess business loss limitations, (3) 100% bonus depreciation, and (4) new business interest expense limitations. It discusses the implications of these changes for various types of pass-through entities and includes examples to illustrate how the new rules may impact common transactions.

1. Locke Lord’s High Noon Knowledge Series
Tax Reform:
Issues and Opportunities
A Primer for MLPs, PE Funds and
Public Companies
March 6, 2018

2. Today’s Presentations
■ Pass-Through Business Income Deduction and Related
Choice of Entity Decisions
Jeffrey D. Wallace
■ Net Operating Losses, Excess Business Losses,
Bonus Depreciation and Business Interest Deductions
Buddy Sanders
■ Carried Interest Taxation
Mitch Tiras
■ Benefits and Compensation Issues for 2018
Edward A. Razim, III
■ Public Company Issues and Disclosures
Michael Blankenship and Eric Johnson

3. Pass-Through Business Income Deduction and
Related Choice of Entity Decisions
Jeffrey D. Wallace
jwallace@lockelord.com
March 6, 2018
Tax Cuts and Jobs Act of 2017

4. I. Old vs. New Law – Tax Brackets
Corporation
Pass Through
(Individual)
2017 35%
10%, 15%, 25%, 28%,
33%, 35%, 39.6%
2018 - 21%
10%, 12%, 22%, 24%,
32%, 35%, 37%

5. II. Prior Treatment of
Pass-Through Income
■ Net income of pass-through businesses (sole
proprietorships, partnerships, LLCs, and S corps) was
not subject to an entity-level tax and was reported by
the owners/equity holders on their individual tax returns
(i.e., pass-through business income was subject to
individual income tax rates).
■ Generally not taxable on subsequent distributions
■ Avoids “double-tax regime” generally applicable to C
corporations

6. ■ New deduction added for certain pass-through income reported
by individuals, estates, and trusts.
■ General pass-through single level of tax continues
■ Intended to balance treatment of pass-through entities given reduction
in corporate tax rate
■ Deduction equals a percentage of otherwise-reported pass-
through income.
■ Subject to limitations based on type of income
■ Many service businesses carved out
■ Subject to certain activity/income related limitations
■ Overall taxable income of the individual
■ Wages paid by the business
■ Value of certain business property
■ Certain limitations not applicable to:
■ qualified real estate investment trust (“REIT”) dividends; and
■ qualified publicly traded partnership (“PTP”) income (i.e., master limited
partnership (“MLP”) income)
III. Changes Made by New Law

7. IV. Pass-Through Business Income
Deduction (“PTID”) Overview
■ New Code Section 199A provides a non-corporate taxpayer (including a trust
or estate) who has certain income (generally “qualified business income”
(“QBI”)) from a partnership, S corp., or sole proprietorship with a new
deduction equal to 20% of such income.
■ QBI generally means the ordinary income – less ordinary deductions - from a
domestic qualifying business
■ Excludes wages and guaranteed payments paid to the taxpayer, short term
capital gain or loss, long term capital gain or loss, and dividend or interest
income.
■ If QBI is negative, treated as a loss in the succeeding taxable year (reduces later
year’s deduction)
■ Deduction subject to below exclusions/limitations
■ Qualified REIT dividends and qualified PTP income are determined separately
from other QBI and are not subject to all limitations
■ qualified REIT dividends do not include capital gain dividends or qualified dividend
income
■ qualified PTP income is determined similar to other QBI (i.e., ordinary income items
from domestic trade or business)

8. IV. PTID Overview (cont’d)
■ Service Company Exclusion:
■ The deduction does not apply to income from (i) the business of being an
employee or (ii) certain specified service businesses (i.e., health, law, consulting,
athletics, financial services, or any trade or business where the principal asset is
the reputation or skill of one or more of its employees or owners, or that involves
the performance of services that consist of investment-type activities)
■ Exclusion (with respect to specified services businesses) does not apply until
taxable income exceeds $315,000 for individuals filing jointly ($157,500 for other
individuals), with benefit of deduction fully phased out over the next $100,000 of
taxable income for joint filers ($50,000 for other individuals)

9. ■ Activity Limitations
■ Deduction capped at the greater of:
■ 50% of the taxpayer’s allocable share of the W-2 wages paid by the
business, or
■ 25% of the taxpayer’s allocable share of the W-2 wages paid by the
business plus 2.5% of the taxpayer’s allocable share of the unadjusted
basis of certain qualified property held by the business
■ Activity limitations phased in over levels similar to phase-in of specified
business income (i.e., limitations apply if taxable income exceeds $315,000
for individuals filing jointly or $157,500 for other individuals and are fully
phased in over the next $100,000 of taxable income for joint filers or
$50,000 for other individuals)
■ The above activity limitations do not apply to qualified REIT dividends or
qualified PTP income
■ Overall Income Limitation: Deduction subject to cap based on 20% of
the excess of the taxpayer’s taxable income over net capital gain (taking
qualified cooperative dividends of the taxpayer into account)
IV. PTID Overview (cont’d)

10. ■ Deduction Details:
■ The deduction is available regardless of whether a taxpayer itemizes deductions
or takes the standard deduction
■ This is a below-the-line deduction that reduces taxable income but not AGI
■ Tax rate impact:
■ The deduction reduces the effective top rate from 40.8% under prior law (39.6%
top rate plus a 1.2% phase out of itemized deductions for high earners) to 29.6%
under the new law (a new 37% top rate net of a 20% deduction = 29.6%)
■ Applicable years:
■ Tax years beginning after Dec. 31, 2017 and before January 1, 2026
■ Longevity concerns?
IV. PTID Overview (cont’d)

11. IV. PTID Overview - Effective Tax Rates
Corporation Pass Through
Pass Through
(Qualified Rate)
Pre-Tax Income $100 $100 $100
Entity Tax – Federal 21% 0% 0%
Entity Tax – State (net of
federal deduction)
6% 0% 0%
Net Cash $73 $100 $100
Shareholder Tax – Entity
Earnings
0% 37% 29.6%
Shareholder Tax –
Qualified Dividend
20% 0% 0%
Shareholder Tax –
NIIT/SET
3.8% 3.8% 3.8%
Shareholder Tax – State
Tax
7.5% 7.5% 6%
Shareholder Tax – Total 31.3% 48.3% 39.4%
Net Cash $50.15 $51.70 $60.60
2018 Effective Tax Rate 49.85% 48.30% 39.40%
Pre-2018 Combined
Effective Tax Rate
58.58% 49.40% 49.40%
Change -8.73% -1.10% -10.00%

12. V. Choice of Entity
■ Factors considered under prior law.
■ Corporate vs. pass-through tax rates
■ Single- or double-tax regime
■ Deductibility of losses?
■ Retention vs. distribution of cash
■ Accumulated earnings tax
■ Personal holding company tax
■ UBTI/ECI concerns
■ Exit strategy
■ Corporate acquiror using stock?
■ Benefit of basis bump up to buyer?
■ Availability of Section 1202 exclusion?
■ Capital structure
■ Limits on number or types of owners?
■ Flexibility in capital structure?
■ Available accounting methods
■ State tax items
■ Inefficient to unwind C corporation

13. V. Choice of Entity (cont’d)
■ Above factors continue to be equally relevant under the new law.
■ Similar metrics, but lower corporate rate may change the calculations
■ New factors to consider under the new law.
■ Is the business owner entitled to the pass-through QBI deduction?
■ Individual limitations on deductibility of state income taxes
■ Potential effect of new changes affecting cross-border income
■ Possibility of further law changes (including effective date limitations of new
law kicking in)
■ MLPs maintain rate advantage over corporations (and potentially have
rate advantage over other pass-through entities) since the full QBI
deduction should apply for each MLP’s domestic trade or business
■ Currently applicable for tax years beginning after Dec. 31, 2017 and before January 1,
2026

14. Net Operating Losses, Excess Business Losses,
Bonus Depreciation and Business Interest
Deductions
Buddy Sanders
bsanders@lockelord.com
March 6, 2018
Tax Cuts and Jobs Act of 2017

15. Net Operating Losses – NOLs
■ Under Prior Law:
■ C Corporations were generally allowed to carryback NOLs
two years and forward 20 years to fully offset taxable
income in such years.
■ Under the Tax Cuts and Jobs Act:
■ NOLs less valuable with 21% Corporate Tax Rate.
■ NOLs arising in tax years ENDING in 2018 or thereafter:
■ may no longer be carried back;
■ can be carried forward indefinitely;
■ NOLs arising in tax years BEGINNING in 2018 are limited
to 80% of carryforward year’s taxable income.
■ NOLs incurred in tax years ending before 2018 are still
subject to the prior law on NOLs.

16. Net Operating Losses – NOLs
Example
■ Purchaser, a C corporation, acquires Target, a C corporation with a
calendar year tax year, on February 1, 2018.
■ Target is obligated to pay significant bonuses to its executives upon a
change of control.
■ Because Target pays the bonuses in early 2018 and immediately closes
its tax year, the bonus payments generate a significant NOL for Target.
■ Under prior law:
■ Sellers (to the extent it negotiated for pre-Closing Tax benefits) could retain
the benefit of the NOL as Target was entitled to carryback the NOL to its two
prior tax years.
■ Under the Tax Cuts and Jobs Act:
■ Target cannot carryback the NOL and thus Sellers effectively lose the benefit
of the NOL (unless negotiate for post-Closing tax benefits).
■ Depending on the tax structure of the transaction, Purchaser, not Target, can
utilize the NOL carryforward (subject to certain limitations (382)).

17. Excess Business Losses
■ Under Prior Law, taxpayers could generally deduct business losses
against other income realized in the same tax year.
■ The Tax Cuts and Jobs Act now disallows taxpayers (other than C
Corps) from deducting “excess business losses” from sole
proprietorships, partnerships, S corporations and LLCs taxed as any
of the above.
■ For partnerships and S corporations, excess business losses are
calculated and applied at the partner/shareholder level.
■ Excess business loss – the excess of a taxpayer’s trade or business
deductions over its trade or business income/gain plus an additional
inflation adjusted amount - $250,000 (single individual), $500,000
(joint return) for 2018. Applies to active, not passive losses.
■ Excess business losses are carried forward as NOLs to future tax
years – subject to new 80% NOL limitation.

18. Excess Business Losses
Example
■ In 2017, X (single) and Y (married) start a business, the XY LLC (taxed
as a partnership), as equal active members (not passive investors).
■ XY LLC’s 2018 partnership tax return reports a net loss of $700,000. X's
and Y's allocable share of the loss is $350,000 each, which they report
on their respective 2018 individual tax returns.
■ Also in 2018, X and Y each received $350,000 in salary from other
sources.
■ X, as a single filer, can only utilize $250,000 of the XY LLC losses to
offset his salary netting $100,000 of taxable income in 2018 and a
$100,000 excess business loss ($350,000 loss minus the utilized
$250,000).
■ Y has no excess business loss because his allocable share of $350,000
is less than the $500,000 married filer threshold and can fully offset his
$350,000 salary with the $350,000 XY LLC loss in 2018.
■ X can indefinitely carryforward his $100,000, 2018 excess business loss
as an NOL subject to the new 80% limitation discussed above.

19. Potential Tax Planning on Excess
Business Losses
■ GET MARRIED -- $500K Threshold (vs $250K)

20. Section 168(k) – 100% Bonus
Depreciation
■ Under Prior Law:
■ Taxpayers were allowed up to 50% bonus depreciation in
the year it placed “original use,” “qualified property” in
service.
■ Qualified property – generally includes MACRS
qualifying property (i.e., most machinery, equipment
or other tangible property except buildings; most
computer software).
■ Original use requirement – used property did not
qualify for bonus depreciation.

21. Section 168(k) – 100% Bonus
Depreciation (cont’d)
■ Under the Tax Cuts and Jobs Act:
■ 100% bonus depreciation (i.e., full expensing) for qualified
property placed in service after Sept. 27, 2017 and before
January 1, 2023 with phase-down thereafter at 20% per
year.
■ Repeal of original use requirement - bonus depreciation
now applies to new and used qualified property (if new to
TP).
■ 100% expensing plus original use requirement repeal
potentially provides a major tax benefit to asset purchases
and deemed asset purchases (e.g., Rev. Rul. 99-6,
purchase DRE through pre-closing F-Reorganization,
Section 338/336(e) elections) over stock acquisitions.
■ Not available on Related Party purchases.

22. Section 168(k) – 100% Bonus
Depreciation – Example
■ In late 2018, Private Equity LLC has $100 million in income and cash.
■ Private Equity LLC decides to acquire from Target Holding Co all of
the LLC interests of Target LLC, taxed as a disregarded entity, that
operates a manufacturing business.
■ By buying all LLC Interests, the transaction is effectively treated as
an asset purchase, providing Private Equity LLC with a basis step-up
in the newly acquired Target assets including manufacturing
equipment.
■ Under the Tax Cuts and Jobs Act, assuming Private Equity LLC
places the equipment in service in 2018, it can deduct 100% of the
purchase price allocated to the acquired equipment in 2018.
■ By acquiring all of Target LLC, Private Equity LLC is able to take a
current and immediate deduction that could remove any Taxes owed
by its partners. Up to a $37 million tax benefit.

23. Potential Tax Planning
■ Consider your business income situation before
engaging in a Merger or Acquisition.
■ If little to no income, then 100% depreciation from a
transaction would be NOLs or possibly subject to Excess
Business Loss limitations (both subject to 80% limits in
future years).
■ If significant income for the year, it may be a great
time to do an Acquisition (especially towards end of
year). Make sure you engage in a transaction to
get a full Step Up in Basis in the Assets.
■ Avoid stock acquisitions unless able to step up basis in
assets.

24. Business Interest Limitations
■ Limits deduction for business interest expense to sum of
business interest income plus 30% of the ‘adjusted taxable
income’ (ATI) of a taxpayer for the taxable year.
■ ATI is defined similarly to EBITDA for tax years beginning after
2017 and before 2022, and similarly to EBlT for tax years
beginning after 2021.
■ Allows disallowed interest deductions to be carried forward
indefinitely.
■ Exempts taxpayers with average gross receipts for the three-
year period ending with the prior taxable year that do not
exceed $25 million.
■ Provides that limitation applies to both related party and third
party debt.
■ Excludes an electing real estate trade or business.

25. Business Interest Limitations
Application to a partnership (LLC)
■ The limitation is applied at the partnership level.
■ The partnership:
■ Determines its ATI under the general rules described above.
■ Deducts business interest expense up to the sum of its business
interest income and 30% of its ATI; and
■ Allocates disallowed business interest expense (“excess business
interest”) to its partners.
■ Each partner for purposes of calculating its ATI, disregards
partnership items and takes into account only its share of
the partnership’s “excess taxable income”.
■ “Excess taxable income” of the partnership is the partnership’s ATI x
(unused limitation/total limitation), or ATI of the partnership available
to be used by the partners.

26. Business Interest Limitations
Carryforward by partner:
■ To the extent interest is not deductible at the partnership
level, the carryforward (“excess business interest”) is at the
partner level.
■ The interest expense carryforward may only be offset by the
partner's share of “excess taxable income” of the
partnership in the next taxable year (not business income
from other sources).

27. Business Interest Limitations For
Partnerships and LLCs – Example
ABC
$200 adjusted taxable income (EBITDA)
$-40 business interest expense
$160 income allocable to partners
ETI = $200 x ($20/$60, i.e. ($20) unused
limitation/total limitation ($60, (i.e. $200 x
.33)).
XYZ Corporation
$33 ETI from partnership
$80 Taxable income from partnership
$0 business income from other sources
Business interest expense at XYZ is
deductible to the extent of 30% of ETI
(i.e., $10).
XYZ
Corporation
Individual
ABC
50%
50%

28. PE Implications
■ Leverage becomes more expensive on after-tax
basis
■ More equity and less debt.
■ Preferred equity in place of debt.
■ Lease financing in place of debt.

29. Tax Cuts and Jobs Act of 2017
Carried Interest Taxation
Mitch Tiras
mtiras@lockelord.com
March 6, 2018

30. Prior Treatment of Carried Interests
■ Receipt of a partnership interest in exchange for services is taxable to
the recipient at ordinary income rates at the time of grant based upon the
value of the interest received.
■ A partnership profits interest (i.e. a “carried interest”), as opposed to a
capital interest, may be deemed to have a zero value resulting in no tax
recognized upon receipt.
■ A partnership interest (including a carried interest) is a capital asset.
■ In general, capital assets are subject to tax at long-term capital gain rates
upon disposition so long as a one-year holding period had been satisfied.
■ Long-term capital gains of a partnership are passed through to its partners.

31. New Treatment of Carried Interests
■ New Section 1061 now provides for a three year holding
period to achieve long-term capital gain with respect to
“applicable partnership interests” held by a taxpayer.
■ If the relevant interest is not an “applicable partnership interest”,
prior carried interest treatment applies.
■ If the relevant interest is an “applicable partnership interest”,
dispositions within three years may result in short-term capital gain
(i.e., ordinary rates).

32. New Treatment of Carried Interest –
Statutory Language
■ Section 1061(a) -- “If one or more applicable partnership interests
are held by a taxpayer at any time during the taxable year, the
excess (if any) of: (1) the taxpayer’s net long-term capital gain
with respect to such interests for such taxable year, over (2) the
taxpayer’s net long-term capital gain with respect to such interests
for such taxable year computed by applying paragraphs (3) and
(4) of sections 1222 by substituting ‘3 years’ for ‘1 year’, shall be
treated as short-term capital gain, notwithstanding section 83 or
any election in effect under section 83(b).”

33. New Treatment of Carried Interest –
“Applicable Partnership Interest”
■ “Applicable partnership interest”
■ Definition - Any interest in a partnership which, directly or indirectly, is
transferred to (or is held by) the taxpayer in connection with the performance
of substantial services by the taxpayer, or any other related person, in any
applicable trade or business.
■ An interest held by an individual employed by another entity that is
conducting a trade or business (which is not an applicable trade or
business) and who provides services only to that other entity is not an
applicable partnership interest.
■ “substantial services” remains undefined by the new legislation.

34. New Treatment of Carried Interest –
“Applicable Trade or Business”
■ “Applicable trade or business”
■ Definition -- Any activity conducted on a regular, continuous, and
substantial basis which, regardless of whether the activity is
conducted in one or more entities, consists (in whole or part) of
raising or returning capital, and either:
■ Investing in (or disposing of) specified assets (or identifying
specified assets for such investing or disposition), or
■ Developing specified assets.

35. New Treatment of Carried Interest –
“Applicable Trade or Business”
■ Legislative History provides limited guidance:
■ Developing specified assets is deemed to take place if it is represented to
investors, lenders, regulators, or others that the value, price, or yield of a
portfolio business may be enhanced or increased in connection with choices
or actions of a service provider or of others acting in concert with or at the
direction of a service provider.
■ Services performed as an employee of an applicable trade or business are
treated as performed in an applicable trade or business for purposes of this
rule.
■ Voting shares owned does not amount to development; “for example, a
mutual fund that merely votes proxies received with respect to shares of
stock it holds is not engaged in development.”

36. New Treatment of Carried Interest –
“Specified Asset”
■ “Specified assets” include:
■ Securities
■ Commodities
■ Real estate held for rental or investment
■ Cash or cash equivalents
■ Options or derivative contracts with respect to any of the
foregoing, and
■ An interest in a partnership to the extent of the partnership's
proportionate interest in any of the foregoing.

37. New Treatment of Carried Interest –
Exceptions
■ Specific Exceptions (from Applicable Partnership Interest)
■ Interests in a partnership held by a corporation (directly or indirectly).
■ Note: Current language does not make a distinction between C corporations
and S corporations. The position of the IRS is that this was a technical oversight
and should be corrected.
■ Any capital interest in a partnership which provides the taxpayer with a
right to share in partnership capital commensurate with either:
■ The amount of capital contributed (determined at the time the interest is
received), or
■ The value of the interest subject to tax under Section 83 upon the receipt or
vesting of that interest.

38. New Treatment of Carried Interest –
Special Rule
■ Special Rule (Section 1061(b)) -- The Act provides that the IRS has the authority
to provide that Section 1061(a) will not apply to income or gain attributable to any
asset not held for portfolio investment on behalf of third party investors.
■ 1061(b) may be an attempt to narrow the scope of the provision, but seems
to put the onus on the IRS to take action.
■ “Portfolio investment” is not defined or otherwise used in the Act.
■ A “third party investor” is defined as a person who:
■ Holds an interest in the partnership that does not constitute property held in
connection with an applicable trade or business; and
■ Is not (and has never been) actively engaged, and is not (and was never) related
to a person engaged, in (directly or indirectly) providing substantial services for
that partnership or any applicable trade or business.
■ Question whether a joint venture between two active participants would be
subject to Section 1061(a) without IRS intervention.

39. New Treatment of Carried Interest –
Application
■ To which “interests/assets” does the new three year holding period
apply?
■ Outside partnership interest?
■ Assets inside partnership?
■ Both?
■ Not entirely clear but “with respect to” language likely broad enough to
include both.
■ May lead to non-intuitive results.
■ May be different results if underlying partnership assets are treated as
property used in a trade of business which are either subject to
depreciation or real estate.
■ Code Section 1231(b) assets have separate one-year holding period.
■ It is unclear whether this was a technical oversight.

40. New Treatment of Carried Interest –
Application – Considerations
Consider the following examples:
■ A partnership issues a carried interest in 2020 and that partnership acquires a
capital asset in 2022. In 2024, the partnership/partner desires to exit by selling
the asset/carried interest for a gain.
■ Will gain be long-term capital gain if asset is sold? No (arguably) -- Asset has not
been held for more than 3 years.
■ Will gain be long-term capital gain if carried interest is sold? Yes (arguably) -- Carried
interest has been held for more than 3 years.

41. New Treatment of Carried Interest –
Application – Considerations
■ A partnership acquires a capital asset in 2020 and issues a carried interest in
2022. In 2024, the partnership/partner desires to exit by selling the asset/carried
interest for a gain.
■ Will gain be long-term capital gain if asset is sold? Yes (arguably) -- Asset has been
held for more than 3 years.
■ Will gain be long-term capital gain if carried interest is sold? No (arguably) -- Carried
interest has not been held for more than 3 years.
■ A carried interest that has been held for over three years is redeemed and then
underlying capital assets of the partnership that have been held by the
partnership for less than three years are sold.
■ Will gain be long-term capital gain? Yes (arguably) -- Carried interest has been held
for more than 3 years.
■ Consider whether the new related party transfer rules would apply.

42. New Treatment of Carried Interest –
Transfers to Related Persons
■ Transfers of applicable partnership interests (directly or
indirectly) to related persons are subject to tax (as short-
term capital gain) with respect to any asset held for not more
than three years as is allocable to the interest.
■ A person is “related” to the taxpayer if:
■ The person is a member of the taxpayer's family within the meaning of
Section 318(a)(1) (includes spouse, children, parents, grandparents), or
■ The person performed a service within the current calendar year (or the
preceding three calendar years) in any applicable trade or business in or for
which the taxpayer performed a service (for example, a colleague). [Note:
This clause includes parties that would not typically be deemed related.]

43. New Treatment of Carried Interest –
Transfers to Related Persons
■ The transfers to related persons provision applies to persons related as
members of a family pursuant to Section 318(a)(1).
■ Notably, attribution from partnerships, estates, trusts, and corporations is
addressed in Section 318(a)(2). Therefore, transfers to related entities under
Section 318(a)(2) would appear to not be included within this provision.
■ The intent of this provision seems unclear.
■ The language of this provision does not include the specific reference to
Section 1222. Question whether Section 1231(b) assets would now be
subject to a three year hold period for these transfers.
■ Could this provision apply to otherwise non-taxable transfers?

44. Compensation and
Benefits Update
Edward A. Razim, III
erazim@lockelord.com
March 6, 2018

45. TAX CUTS AND JOBS ACT
■ The “Tax Cuts and Jobs Act” made a number of
changes to the tax rules governing executive
compensation arrangements which impact both
publicly traded and privately held entities.
■ The Act also eliminated a number of key
deductions that apply to employee compensation
arrangements.

46. SECTION 162(M) CHANGES
■ The Act eliminated the performance-based
compensation exception to Code Section 162(m).
■ Code Section 162(m) limits tax deductions for payments
in excess of $1 million to certain top executives (the
“covered employees”) of publicly traded corporations.
■ The Act also eliminates two key exceptions to the $1
million deduction limitation and expands the group of
executives who are classified as covered employees.

47. SECTION 162(M) CHANGES
■ The exception for commissions and performance-
based compensation paid to covered employees is
eliminated.
■ The definition of “covered employee” is expanded
to include the CFO. A covered employee will
include the CEO, CFO and three other highest
paid employees.
■ The definition of “covered employee” will also include
any person who was a covered employee for any prior
taxable year beginning after December 31, 2016.

48. SECTION 162(M) CHANGES
■ Once an executive is classified as a covered
employee, the deduction limitation will continue to
apply to that individual during any period the
corporation pays remuneration to such person (or
to any of his or her beneficiaries).
■ This will significantly expand the number of impacted
individuals and will cause the deduction limit to apply to
payments to former employees.

49. SECTION 162(M) CHANGES
■ The corporations subject to Section 162(m) is
expanded to include issuers of securities required
to file reports under Section 15(d) of the Exchange
Act (e.g., corporations with registered debt
securities).
■ The Tax Bill includes a transition rule that would
grandfather remuneration that is provided pursuant
to a written binding contract which was in effect on
November 2, 2017, and which was not modified in
any material respect after such date.

50. EXEMPT ORGANIZATION
“GOLDEN PARACHUTE” TAX
■ The Act imposes a new excise tax on excess tax-
exempt organization executive compensation.
■ A tax-exempt organization will be subject to a 21%
excise tax (the corporate tax rate) on the sum of (i)
remuneration paid to a covered employee in excess of
$1 million, and (ii) an excess parachute payment paid to
a covered employee.
■ A covered employee includes an employee and former
employee who (i) is one of the five (5) highest
compensated employees of the organization for the
taxable year, or (ii) was a covered employee for any
preceding taxable year beginning after 12/31/2016.

51. EXEMPT ORGANIZATION
“GOLDEN PARACHUTE” TAX
■ Remuneration includes all W-2 wages, other than
designated Roth contributions, paid by the tax-exempt
organization or any related organization.
■ Any amounts taxable under Section 457(f) are
included as part of remuneration, and remuneration
will be treated as paid when there is no substantial
risk of forfeiture of the rights to such remuneration.
■ Remuneration does not include amounts paid to a
licensed medical professional (including a
veterinarian) for the performance of medical or
veterinary services.

52. EXEMPT ORGANIZATION
“GOLDEN PARACHUTE” TAX
■ A payment is an “excess parachute payment” if the total
present value of all parachute payments exceeds three
times the covered employee’s base amount.
■ If the 3-times threshold is exceeded, the excess
parachute payment subject to the excise tax equals
the amount of the parachute payments less the base
amount.
■ This is similar to the Section 280G tax penalties with
respect to change in control excess parachute
payments paid to employees of for-profit
corporations.

53. EXEMPT ORGANIZATION
“GOLDEN PARACHUTE” TAX
■ A payment is a parachute payment if it is contingent
on the covered employee’s separation from
employment.
■ A parachute payment does not include any
payments made under qualified retirement plans,
Section 403(b) or 457(b) annuity plans, but may
include payments under 457(f) plans.
■ A parachute payment does not include payment to a
licensed medical professional (including a
veterinarian) for the performance of medical or
veterinary services.

54. EXEMPT ORGANIZATION
“GOLDEN PARACHUTE” TAX
■ A covered employee’s base amount is the covered
employee’s average W-2 compensation over the five
years preceding the separation from employment.

55. QUALIFIED EQUITY GRANTS
■ The Act adds new Code Section 83(i) under which
qualified employees of privately held corporations
could elect to defer, for up to five years, the
income tax (but not employment taxes) on income
from stock acquired in connection with the
exercise of non-qualified stock options or the
settlement of restricted stock unit (RSU) awards if
certain conditions are satisfied.

56. QUALIFIED EQUITY GRANTS
■ This provision has fairly limited use since the
RSUs or options must be made available to 80%
of employees in a privately held company.
■ The exclusion of significant owners and certain
officers also limits the use of this provision.
■ Qualified employees of an eligible corporation will
benefit from this opportunity to defer income
recognition on common forms of equity awards.

57. TRANSPORTATION BENEFITS
■ Employer deductions for qualified transportation
fringe benefits are eliminated beginning in 2018.
■ The Act also eliminates the exclusion for bicycle
commuting expenses for tax years beginning after
December 31, 2017 and ending in 2025.
■ But employees will continue to be able to receive these
benefits from the employer or pay for these benefits
(other than bicycle commuting) on a tax-free basis
through an employer-sponsored salary reduction
program.

58. TRANSPORTATION BENEFITS
■ Tax-exempt employers will be taxed on the value
of providing qualified transportation fringe benefits,
such as payments for public transportation or the
cost of employer owned parking facilities, by
treating the funds used to pay for the benefits as
unrelated business taxable income.

59. MOVING EXPENSES
■ The Act repeals the exclusion from income for
qualified moving expense reimbursements.
■ The Act also provides that an individual taxpayer
may not deduct his or her moving expenses,
except for members of the Armed Forces on active
duty or who move pursuant to a military order.
■ The tax rules for employer-provided housing for
the convenience of the employer under Code
Section 119 remain unchanged.

60. ACHIEVEMENT AWARDS
■ Code Section 274(j) was revised to provide that
the exclusion from income for employee
achievement awards for length of service or safety
achievement is limited to only tangible awards.

61. ENTERTAINMENT EXPENSES
■ The Act disallows deductions for entertainment,
amusement, or recreation activities even if directly
related to or associated with the active conduct of
the taxpayer’s trade or business for amounts paid
or incurred after 2017.
■ But the prior exception from imputed income for
entertainment provided to employees and/or
independent contractors, food and beverages provided
on employer premises, and goods, services, or facilities
available to the public remains.

62. AFFORDABLE CARE ACT
■ The Tax Act eliminates the individual mandate
penalty for failure to have medical coverage
beginning in 2019.
■ This causes individuals to not be penalized for failure to
be covered by health insurance.
■ This will eliminate the need for the Federal government
to provide premium subsidies, lowering the federal
budget deficit by $314 billion over 10 years.
■ But it will likely raise premiums in the individual market
as healthy individuals will drop health insurance
coverage.

63. RETIREMENT PLAN CHANGES
■ The one significant change in the Tax Act for
qualified retirement plans will permit participants
who terminate employment with a plan loan to
extend the deadline from the current 60 days to
the due date of their tax return for the applicable
year for rolling over the outstanding amount tax-
free to an IRA.

64. Public Company Issues and
Disclosures
Michael J. Blankenship
michael.blankenship@lockelord.com
Eric Johnson
ejohnson@lockelord.com
March 6, 2018

65. Public Company Issues and
Disclosures
■ Staff Accounting Bulletin (SAB) 118 - guidance is intended to
help companies provide investors with timely and useful
information.
■ SAB 118 applies only to the application of ASC 740 in connection
with the Act and should not be relied upon for other changes in tax
law.
■ Compliance and Disclosure Interpretation (C&DI) 110.02
answers questions companies have raised about Form 8-K
filing requirement.

66. Public Company Issues and
Disclosures
■ ASC 740 – Background
■ Requires companies to account for the effects of
changes in income tax rates and tax laws on deferred tax
balances (including the effects of the Act's one-time
transition tax on certain foreign earnings) in the period in
which the legislation is enacted.
■ The financial statement effects of a change in tax law are
recorded as a component of income tax expense related
to continuing operations.

67. Public Company Issues and
Disclosures
■ SAB 118 provides guidance for the following:
■ Accounting for income tax effects is completed
■ Accounting for income tax effects is incomplete but the
company can make a reasonable estimate
■ Accounting for income tax effects is incomplete and the
company is unable to make a reasonable estimate
■ The “measurement period” approach can be applied to
comply with ASC 740.
■ The measurement period begins in the reporting period that
includes the Act's enactment date and ends when a
company has obtained, prepared and analyzed the
information needed to complete the accounting
requirements under ASC 740.

68. Public Company Issues and
Disclosures
■ SAB 118 does not define reasonable estimate; instead
based on its facts and circumstances, including:
■ availability of records to complete the necessary
calculations, and
■ technical analysis of the new tax law and finalization of
the accounting analysis.
■ SAB 118 provides examples (assumes the company has
only one foreign subsidiary).
■ A company that has more than one foreign subsidiary
may reach different conclusions for each subsidiary,
depending on the facts and circumstances, including the
availability of information necessary to complete the
analysis.

69. Public Company Issues and
Disclosures
■ Disclose information about:
■ Qualitative information about the income tax effects of the Act for
which the accounting is incomplete
■ Items reported as provisional amounts
■ Existing current or deferred tax amounts for which the income tax
effects of the Act have not been completed
■ Reason the initial accounting is incomplete
■ Additional information that needs to be obtained, prepared or
analyzed to complete the accounting requirements under ASC 740
■ Nature and amount of any measurement period adjustments
recognized during the reporting period
■ Effect of measurement period adjustments on the effective tax rate
■ When the accounting for the income tax effects of the Act has been
completed

70. Public Company Issues and
Disclosures
■ Evaluate to ensure that the accounting
implications of the transition and future tax
provision calculations are accurately
recorded in the financial statements.
■ Key areas requiring controls include:
■ processes for estimating and finalizing
provisional amounts
■ calculating the one-time transition tax
■ assessing the realizability of deferred tax
assets and carryforwards
■ calculating any minimum taxes and making
disclosures

71. Public Company Issues and
Disclosures
■ Form 8-K Requirements
■ SEC Staff issued C&DI 110.02 about deferred tax asset (DTA) to address
whether the new tax rates or other provisions of the Act would trigger an
obligation to file a Form 8-K under Item 2.06, Material Impairments.
■ The remeasurement of a DTA to reflect the effect of a change in tax rate or
tax laws is not an impairment under ASC 740 and wouldn't trigger the 8-K
reporting requirement.
■ The enactment of new tax rates or tax laws could have financial reporting
implications, including whether it is more likely than not that the DTA will be
realized.
■ A company that uses the "measurement-period" approach of SAB 118 and
concludes "that an impairment has occurred due to changes resulting from
the enactment of the Act may rely on the Instruction to Item 2.06 and
disclose the impairment, or a provisional amount with respect to that
possible impairment, in its next periodic report.”

72. Public Company Issues and
Disclosures
■ Practical Implications - What does it mean for public
companies?
■ Voluntary Disclosures / Regulation FD
■ Earnings Releases
■ Item 2.02 of Form 8-K
■ Other Disclosure in Periodic Reports
■ Non-GAAP Financial Measures
■ Section 162(m)