Late last year, the IRS issued final regulations under Section 162(m). Here’s what you need to know about them.
A quick refresher for those of you who only vaguely recollect something about Section 162(m) changing: Section 162(m) limits the tax deduction public companies can claim for compensation paid to specified employees to $1 million per employee. As it was originally adopted in 1993, performance-based compensation, including stock options and performance-based equity awards were exempt from the limitation. This caused companies to start loading up executives with stock options, which turned out to be a huge windfall for executives, but that is a story for another blog entry (which I’ve already written—see “CEO Pay, Bananas, and Unintended Consequences”).
Back in 2017 (you remember 2017—back when masks were for Halloween and we went to parties), Congress passed The Tax Cuts and Jobs Act, which significantly expanded the scope of Section 162(m) by both increasing the number of employees covered under the provision and eliminating the exception for performance-based compensation.
When it expanded the scope of Section 162(m), the TCJA carved out a loophole: compensation arrangements already in effect when the bill was first introduced into Congress (November 2, 2017) would be grandfathered, provided they meet the following conditions:
Now we have the final word on the above two questions and many others.
For the most part, the final regulations simply adopt the proposed regulations with very few changes. Here are some of the key parts of the proposed regulations that relate to equity compensation that were not changed in the final regulations:
Well, not much that relates to stock compensation, but there are a couple of bits of good news:
For a discussion of the final regs, listen to the NASPP webinar “What’s Next for Equity Compensation in 2021?” See also memos by RSM US, Skadden Arps, Ropes & Gray, and Akin Gump.
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