IRS Provides Guidance On Application Of Code Section 162(m) As Amended By The Tax Cuts And Jobs Act Of 2017

Author:Mr Joshua Agen and Kathleen Dreyfus Bardunias
Profession:Foley & Lardner

On August 21, 2018, the IRS issued initial guidance (Notice 2018-68) to assist companies in determining how the changes made to Internal Revenue Code Section 162(m) ("Section 162(m)") by the Tax Cuts and Jobs Act of 2017 (the "Act") affects the deductibility of their compensation arrangements. The guidance focused on two aspects: (1) determining who is a "covered employee" under the new Section 162(m) rules and (2) defining when an arrangement is considered "grandfathered," such that the arrangement may continue to be governed by the old (pre-tax reform) Section 162(m) rules. This article focuses on the guidance related to determining when a compensation arrangement is grandfathered. We previously addressed the guidance about determining "covered employees" in a separate article.


Section 162(m) limits the tax deduction a publicly held company can take with respect to compensation paid to its "covered employees" to no more than $1 million per year.

The Act made the following notable changes to the Section 162(m) rules for tax years beginning on or after January 1, 2018:

The definition of "covered employee" was expanded to include anyone acting as CEO or CFO at any time during the year and the three other most highly compensated executive officers (determined with reference to Securities and Exchange Commission rules) Once an individual becomes a "covered employee" under the new Section 162(m) rules, he or she always remains a "covered employee" (even following termination of employment) "Performance-based compensation" paid to covered employees is now subject to the $1 million deduction limitation The Act included significant transition relief (referred to as the "grandfathering rules"), under which none of the changes to Section 162(m) apply to compensation provided pursuant to a written binding contract that was in effect on November 2, 2017, and not modified in any material respect on or after such date. This means that "grandfathered" compensation will be deductible under the more expansive older Section 162(m) rules, including that qualified performance-based compensation will not count toward the $1 million limit and grandfathered compensation paid to the CFO is generally going to be fully deductible.

What Constitutes a "Written Binding Contract?"

For compensation to be grandfathered, it must be provided pursuant to a "written binding contract" in effect on November 2, 2017.

"Binding" Means Obligated Under Law

The IRS...

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