Tax consequences of compensation clawbacks for issuers and executives
Corporate executives with lucrative contracts can be subject to “clawbacks”, or reclaiming of already-paid compensation, for violating company policy, agreement, or law. This can raise questions about the tax implications for both the company who issued the clawback and the executive who has had her compensation clawed-back.
For the issuer:
Compensation subject to clawback is accrued under normal principles; clawback contingency is “remote” and should not defeat accrual. But if incentive-based compensation is deducted in one taxable year of company, and recouped in a subsequent taxable year as erroneously awarded incentive-based compensation, the company might have to take the amount back into income in the year of recoupment under the “tax benefit rule,” which generally requires income inclusion of amount previously deducted when events occur that are “fundamentally inconsistent” with the earlier deduction. For a complete assessment of how to deduct bonus compensation when issued or when clawed back, contact a ShindelRock tax professional.