On December 18, 2020, the IRS released final regulations under 162(m) of the IRS Code to implement the Tax Cuts and Jobs Act (TCJA) changes as well as provide guidance to employers. Section 162(m) focuses on publicly held corporations and deductions for compensation paid to covered employees. This section does not allow these corporations to deduct compensation that exceeds $1 million per year. The TCJA changes the definition of publicly held corporation and covered employee.
Publicly Held Corporation
Previously, a publicly held corporation was defined as a corporation that issued any class of common equity securities that required registration. The TCJA expanded this definition to include corporations with any class of securities, not just common equity securities that required registration. Also included are corporations that are required to file reports under Section 15 of the Securities Exchange Act.
These changes allow for certain additional types of corporations such as S corporations, QSub S corporation subsidiaries, publicly traded partnerships, and others to be subject to the rule limiting the deduction for compensation. Companies required to register under Section 12 of the Securities Exchange Act are subject and the new rules are crafted to prevent companies from using other structures such as partnerships to avoid the rule.
Covered Employee
Similarly, the final regulations expand the definition of covered employee to include:
- Anyone who served as the principal executive officer at any point during the taxable year.
- Anyone who served as the principal financial officer during the taxable year.
- The three highest compensated employees whose compensation must be reported to shareholders under the Exchange Act.
- Anyone who was a covered employee of the corporation or any predecessor publicly held corporation for a preceding tax year beginning after December 31, 2016.
- The publicly-held corporation, if it was public in a prior tax year (with certain timing rules);
- A publicly held corporation that is acquired, or the assets of which are acquired, by another publicly held corporation through reorganization, division, stock acquisition, or asset acquisitions of at least 80% of the fair market value of gross operating assets.
