Tax Consequences of Compensation Clawback

Executives required to repay compensation as a result of a compensation clawback regulation, provision or policy should be mindful of certain tax consequences to the executive as a result of the repayment. As described below, the tax consequences will be different when repayment occurs in a year subsequent to the year of the original payment versus when payment and repayment occur in the same year, and with respect to the former, there is more than one avenue of tax relief available to the executive stemming from the repayment.

When an executive repays compensation in the same calendar year as the year in which it was paid, the repaid compensation will not be considered income for that year, and therefore, will not be subject to tax reporting for the executive. Thus, to the extent repayment occurs in the same year as the initial payment, for tax purposes it is as though the payment was never made.