Section 162(m)

On March 10, 2021, the House passed the fifth major COVID-relief legislation, the American Rescue Plan Act (the “Act”), which it originally passed last week before its amendment and passage by the Senate on March 6.  President Biden is expected to sign the Act on Friday, March 12, 2021.

The Act adopts a new payroll tax credit that is similar to the employee retention credit, which was originally enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and amended by the Consolidated Appropriations Act, 2021 (the “CAA”).  The new credit will be in effect from July 1, 2021, through December 31, 2021.  In addition, the Act significantly increases the exclusion for employer-provided dependent care assistance for 2021, and makes prospective changes to extend the availability of paid leave credits similar to those originally adopted as part of the Families First Coronavirus Response Act (the “FFCRA”) and that are set to expire on March 31.  Finally, the Act will extend the deduction limitation under section 162(m) to additional employees.
Continue Reading American Rescue Plan Act Goes to Biden for Signature: Includes Changes to Employee Retention Tax Credit, Employer-Provided Dependent Care, Paid Leave Credits, and Deduction Limitations for Executive Compensation

On Friday, December 18, the IRS released final regulations under section 162(m) implementing the statutory changes made in 2017 by the Tax Cuts and Jobs Act.  Section 162(m), as amended, generally limits the deduction for compensation (also referred to as applicable employee remuneration) paid to the a publicly held corporation’s principal executive officer (“PEO”), principal financial officer (“PFO”), and its three highest-paid executive officers other than the PEO and PFO.  The final regulations are largely unchanged from the proposed regulations released almost exactly one year earlier.  (See earlier coverage.) The IRS did make a small number of changes in response to taxpayer comments, but declined to make changes in a number of areas.
Continue Reading Final 162(m) Regulations Make Few Changes

To corporations hoping for a holiday reprieve from the IRS’s narrow interpretation of the grandfathering rules included in the Tax Cut and Jobs Act (“TCJA”) amendment of section 162(m), the IRS has said “Bah… Humbug!”  To those foreign private issuers, publicly traded partnerships, and issuers of public debt hoping for relief from the expanded definition of publicly held corporation, the IRS has said the same.  On December 16, the IRS released proposed regulations addressing the changes made to section 162(m) of the Internal Revenue Code as part of TCJA, which are certain to disappoint many taxpayers.  The regulations also address the definitions of covered employee and “predecessor of a publicly held corporation,” as well as, the treatment of amounts paid by a partnership in which a publicly held corporation is a partner and director compensation. The regulations are generally proposed to apply to compensation that is otherwise deductible for taxable years beginning on or after December 20, 2019, the date of expected publication in the Federal Register. 
Continue Reading Proposed 162(m) Regulations are a “Lump of Coal”

Treasury Assistant Secretary for Tax Policy David Kautter attended the AICPA National Tax Conference on November 13, 2019, and commented that significant TCJA-related guidance should be expected to be released before the end of 2019.  Such guidance is likely to include proposed regulations addressing (1) federal income tax withholding under section 3402, (2) the executive compensation deduction limitation under section 162(m), and (3) computation of unrelated business taxable income (UBTI) under section 512. 
Continue Reading Significant TCJA Guidance Due Before End of Year, Kautter Says

Earlier today, the Senate Finance Committee released legislative text of its version of the Tax Cuts and Jobs Act.  Up until now, only “conceptual language” had been available.  The text clarifies some of the provisions that we have previously discussed in our posts about the Senate bill (see earlier discussion here) and includes new information reporting requirements that we have not previously covered:

  • The legislative text would disallow any deduction for meals provided at the convenience of the employer and meals provided in an “employer-operated eating facility.” If the employer chooses to offer food and beverages, they will remain excludable (to the extent currently excludable) from the employee’s income and wages under section 132, but the cost of providing them would not be deductible.  It is somewhat unclear what the effect of the deduction disallowance would be with respect to employer-operated eating facilities that collect sufficient revenue to cover their operating expenses.  Arguably, the provision could result in the employer recognizing revenue for the food and beverages sold to employees in the facility but having no deduction for the costs associated with selling food and beverages.  (Update: Upon further thought, we believe that the employer would not lose the deduction to the extent the employees pay for food and beverages purchased from the employer-operated eating facility because only the value of such food and beverages in excess of the amount paid is excludible from income under Code section 132(e) as a deminis fringe benefit.)  The new total deduction disallowance would be repealed for taxable years beginning after December 31, 2025, provided government revenue exceeds a target during the period 2018 through 2026.  The provision is effective if the cumulative on-budget Federal revenue from all sources for the 2018 through 2026 government fiscal years exceeds $28.387 trillion.
  • As expected, the text would eliminate the exclusion for bicycle commuting reimbursements, but in a surprise, the elimination is only temporary. The bill adds a new Code section 132(f)(8), which suspends the availability of section 132(f)(1)(D) from 2018 through 2025.  The exclusion would become available again in 2026.  This suggests that the Finance Committee’s decision to eliminate this exclusion may be driven more by revenue demands than by policy considerations, as it helps ensure the reconciliation bill meets the revenue target within the budget window.

Continue Reading Senate Tax Reform Legislative Text Clarifies Some Provisions

Yesterday, the full House passed its tax reform proposal, the Tax Cuts and Jobs Act (H.R. 1), on a party-line vote, 227-205.  In addition to the headline changes to the corporate and individual tax systems, the bill would make numerous changes to various fringe benefit exclusions, employer deductions for fringe…
Continue Reading Tax Reform Proposals Advance in the House and Senate

Yesterday, the House Ways and Means Committee released the Tax Cuts and Jobs Act (H.R. 1) (the “Bill”), a bill that, if enacted, would represent the most substantial overhaul of the U.S. tax code in decades.  We are releasing a series of posts to highlight the provisions of the Bill affecting the topics pertinent to our readers, where each post will cover a different area of importance.  In Part I of this series, we covered potential changes to employer-provided benefits, and in Part II, we addressed entertainment expenses and other fringe benefits.  In Part III, we discussed the Bill’s potential impact on various retirement provisions.  In this Part IV of the series, we address proposed changes to the deduction limitation for executive compensation under Code section 162(m).

Currently, Code section 162 allows as a deduction all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.   This includes a deduction for reasonable compensation for personal services actually rendered.   However, Code section 162(m) limits the deduction of any publicly held corporation with respect to compensation paid to a “covered employee” to $1 million.   However, certain types of compensation—such as qualified performance-based compensation and commissions—are not subject to the deduction limitation.  Covered employees are defined to include the chief executive officer (“CEO”), as of the close of the taxable year and the officers whose compensation is required to be reported to shareholders by reason of being among the three most highly compensated officers for the taxable year (other than the CEO).

Section 3802 of the Bill would amend section 162(m) in three key ways: (1) it would eliminate the exceptions for qualified performance-based pay and commissions; (2) it would extend the deduction disallowance to a broader array of companies; and (3) it would amend the definition of covered employee to more closely align with current SEC disclosure requirements and make covered employee status permanent.
Continue Reading Impact of Tax Cuts and Jobs Act: Part IV – Changes to the Section 162(m) Deduction Limitation for Executive Compensation