In December, the Treasury Department and IRS released proposed 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 as 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 TCJA expands the definition of covered employee. In addition to including the CEO or similar officer of the corporation, as well as the four additional highest-compensated employees, it now also includes any employee who served as the principal executive at any point during the taxable year, any employee service as the principal financial officer during the taxable year, and employees whose compensation must be reported to shareholders under the Exchange Act. Further, the TCJA expands the definition of covered employee to including anyone who was a covered employee in the preceding tax year.
Compensation Subject to $1 Million Limit
In changing what compensation is subject to this $1 million limit on deductions, the TCJA eliminated exceptions for performance-based compensation as well as for commissions. Further, it added a rule that the deduction limit applies to all compensation paid to the covered employee, even if the compensation is paid out to another individual such as in the event of compensation paid after death.
The benefits lawyers at Hall Benefits Law work with our clients to implement any procedures to track covered employees and ensure compliance with these new regulations. We can also help structure executive benefits and compensation with this new regulation, and other changes in the TCJA, in mind. Call our office today at 678-439-6236 or visit the Hall Benefits Law website to learn more about our services.
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