Academic journal article Journal of Accountancy

New Law Requires Swift Action to Avoid Penalty Tax

Academic journal article Journal of Accountancy

New Law Requires Swift Action to Avoid Penalty Tax

Article excerpt

President George W. Bush signed the American Jobs Creation Act, which, among other things, introduces requirements for the identification and tax treatment of nonqualified deferred compensation plans (http://waysandmeans.house.gov/Links.asp?section =1559). CPAs should immediately ensure their employers or clients are aware of these provisions, which take effect January 1, 2005, or earlier in the case of a plan that is materially modified after October 3, 2004. The act applies to all compensation earned or vested after December 31, 2004. Treasury Department guidance due to be issued by December 22, 2004, will clarify its scope. Indications are the act's provisions will be interpreted very broadly, affecting far more than just traditional nonqualified deferred compensation. Many equity plans and arrangements with independent contractors will require review. While such plans will need to operate in conformity with the rules beginning in 2005, there will be time to modify them. Affected participants in the compensation plans of companies not in compliance with the act will immediately be taxed on deferred compensation, be subject to a 20% penalty tax and have to pay interest on the tax due at the underpayment rate plus 1%. …

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