What A Trump Presidency And Tax Changes Could Mean For Stock Compensation

Objectively, we know that stock compensation is not one of the biggest issues on people's minds as the United States slithers toward the unexpected reality of a Trump presidency. Naturally, however, it is our role to consider how stock compensation and employee ownership will be affected.

How Do Trump And His Supporters View Stock Compensation?

To get a sense of Donald Trump's views on stock comp, the myStockOptions staff did some in-depth research into SEC filings made by him and his companies. In 1995, the board of Trump Hotels & Casino Resorts adopted what it called its 1995 Stock Incentive Plan, which it amended in 1996 to increase the number of authorized shares it could issue (see pages 20–22 of the company's 1996 proxy statement). Trump himself received 500,000 stock options per year between 2000 and 2002 (see the tables, text, and footnotes on pages 16–18 of the company's 2003 proxy statement). Later, when Trump was chairman of the board at Trump Entertainment Resorts, the company adopted a stock plan at its 2005 annual meeting as part of its reorganization, and it canceled its prior plan and all of the grants made under it (see Proposal 3 on page 35–41 and Annex A of the company's 2005 proxy statement). Like other senior executives, Trump had to file Form 4 with the SEC to report his grants under the rules of Section 16 (see, for example, the reporting of his 2002 grant). Therefore, we can assume that Trump is familiar with stock options and restricted stock, though his company's subsequent bankruptcy eliminated the value of its grants.

It doesn't take a degree from Trump University to know that equity awards made broadly to a company's employees, along with employee stock purchase plans and other forms of employee ownership (e.g. ESOPs), are forms of egalitarian capitalism that can spread a company's wealth and reduce income inequality (see our recent blog commentary on this topic). Trump's supporters seem likely to approve of such a populist approach to employee compensation. However, the recent narrowing of stock grant eligibility and the huge equity comp gains made by senior executives have perhaps given stock compensation an elitist image that Trump's blue-collar supporters can be expected to find deplorable.

Republican Tax Reform May Increase The Value Of Stock Compensation

Tax changes are widely expected under Trump's presidency and the incoming Republican-dominated Congress (see a commentary from CCH). The House GOP Tax Reform Blueprint calls for the simplification of individual income tax rates to 12%, 25%, and 33%. How changes in income-tax rates would tie into the flat supplemental rate of withholding on stock compensation is unclear and would need clarification, as the structure of the rate is based on the current seven tax brackets.

Trump's tax plan does not propose to change the capital gains rates (15% and 20%). However, a reduction in the difference between ordinary income rates and the capital gains rates might affect tax-planning decisions, e.g. whether to hold shares at exercise, vesting, or purchase.

Changes may also include the elimination of the alternative minimum tax (AMT). That would be welcome news for anyone receiving grants of incentive stock options (ISOs), as currently the income spread at ISO exercise can trigger the AMT and complicate tax planning.

In addition, Trump vehemently asserted throughout his campaign that he wants to "repeal and replace" Obamacare. Presumably, that would eliminate the additional Medicare taxes used to fund Obamacare under the Affordable Care Act. Those additional taxes are:

• The 3.8% surtax on net investment income, such as capital gains and dividends, for single filers with yearly modified adjusted gross income of over $200,000 ($250,000 for married couples filing jointly). The removal of the surtax would increase the appeal of holding shares.
• The extra 0.9% Medicare tax owed by the same taxpayers through the withholding on compensation income, such as income from the exercise of nonqualified stock options or the vesting of RSUs.

Given the enormous federal budget deficit, the likely need for 60 votes in the Senate to defeat a filibuster and pass a major tax overhaul, and Trump's inexperience in the art of political compromise, there are no guarantees that these proposals will become law. One possible way to fund them to reduce the impact on the national debt would be to eliminate provisions that are favorable to stock compensation, such as the performance-based exception for limiting the corporate tax deduction under IRC Section 162(m).

Outlook For The Future

In the short term, with little risk of tax increases in 2017, there is no pressing tax-law reason to accelerate income into 2016. Even if you do predict that your tax rates are likely to drop or rise in the future, taxes should never be the only planning consideration for stock options and company stock at year-end. Instead, you may want to let investment objectives and personal financial needs, not tax considerations, drive your year-end planning.

In the long term, your company's stock price, not tax legislation, is likely to be the most crucial factor for your equity compensation. When a stock price falls after grant or becomes excessively volatile, equity grants tend to lose their perceived value (even if stock options do not actually go underwater). Therefore, if stock prices continue to perform well and we avoid the falling prices of a bear market, we can perhaps reasonably expect that stock compensation, ESPPs, and employee ownership will continue to thrive, especially when these opportunities are granted broadly to most or all employees in an egalitarian way. Additionally, the success of stock compensation depends not only on a company's share price but also on the efficacy with which it both communicates its stock plan to employees and provides them with educational resources on their grants.