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IRS Aims to Curb Workaround of Limit on Executive Pay Tax Break

Public companies would have a harder time evading a stricter limit on deductions for compensation paid to top executives under an IRS proposal. The proposed regulations (REG-122180-18) implement a 2017 tax law provision that expanded the scope of tax code Section 162(m), which prevents public companies from getting a tax deduction for executive compensation exceeding $1 million. The rules target a workaround under which corporations could potentially skirt the limit by paying certain top executives part of their compensation through a partnership. McDermott’s Andrew C. Liazos contributes to a Bloomberg Law article that takes a look at how the IRS is working to curb the workaround of the limit on executive pay tax break. Access the full article. Originally published on Bloomberg Law, December 2019

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Exec Comp Regs Crack Down on Partnership Arrangements

Corporations looking to use partnerships to avoid the executive compensation deduction limitation may be out of luck. The new proposed regs (REG-122180-18) on the section 162(m) executive compensation deduction limitation include a rule on compensation paid by a partnership to an executive of a publicly held corporation that’s subject to the limitation. McDermott’s Andrew C. Liazos contributes to a Tax Notes article that takes a look at these new regulations and what they mean for partnership arrangements. Access the full article. Originally published on Tax Notes, December 2019

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Changes in Executive Compensation

In a presentation at McDermott’s Employment and Employee Benefits Forum, Andrew Liazos discussed areas of focus for Section 162(m) and third-party loan funding for employee stock purchase plans (ESPPs). He also provided insight on the new SEC final rule on hedging, and the 21 percent excise tax on pay over $1 million to covered employees at tax-exempt organizations. View the full presentation.

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IRS Issues Long-Awaited Initial Guidance under Section 162(m)

On August 21, 2018, the IRS issued guidance regarding recent statutory changes made to Section 162(m) of the Internal Revenue Code. Overall, Notice 2018-68 strictly interprets the Section 162(m) grandfathering rule under the Tax Cuts and Jobs Act. Public companies and other issuers subject to these deduction limitations will want to closely consider this guidance in connection with filing upcoming periodic reports with securities regulators. Further action to support existing tax positions or adjustments to deferred tax asset reporting in financial statements may be warranted in light of this guidance. Access the full article.

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Exec Retirement Vehicle Seen as a Potential Gamble for Employers

Andrew Liazos said that it makes sense for companies to consider Q-SERPs in response to the end of the performance-based pay deduction, but he questioned whether the plans would offer much “bang for your buck.” “You first have to deal with the obvious time and effort you have to spend to show it’s not discriminatory, and then take a certain level of risk that the rules aren’t going to change,” he said. Access the full article. Originally published in Tax Notes Today, July 2018.

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Impact of Tax Reform on Compensation Structures and Popular Fringe Benefits

US tax reform is changing the game with respect to many of the popular benefits employers have traditionally provided to their employees. These new rules have produced a great deal of questions. However, while the Internal Revenue Service (IRS) is formulating guidance, employers are left to navigate these changes on their own in order to determine the impact on both themselves and their employees. Employers are also reevaluating their benefit offerings in light of the new rules. These issues and more were addressed during the 2018 McDermott Tax Symposium on April 24, 2018. The McDermott panel left the audience with these core takeaways: Due to the suspension of their employees’ ability to take many itemized deductions, employers should consider the feasibility of restructuring their compensation arrangements to save income taxes and FICA taxes. Certain employers that are public employers, private employers with public debt or non-U.S. employers with ADRs...

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Tax Reform Surprises and Strategies with the New 162(m) Rules

Section 162(m) of the Internal Revenue Code (Code) previously limited the tax deduction to $1M annually for covered employee compensation paid by a company that is publicly traded, subject to some important exceptions. The Tax Cuts and Jobs Act modified the reach of Code Section 162(m) in several significant ways. Expanding the number of companies to which Section 162(m) will apply, including non-public companies that register debt or equity securities with the Securities and Exchange Commission, like foreign companies publicly traded through American depositary receipts (ADRs); Expanding the number of covered employees to five and including the chief financial officer, with a provision that any covered employee after 2016 permanently remains a covered employee; Eliminating performance-based and commission-based exceptions to the $1M deduction limit; and Grandfathering certain compensation provided under a written and binding agreement in effect on November...

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Section 162(m) Final Regulations Clarify Requirements for Exemptions to $1 Million Deduction Limitation

On March 31, 2015, IRS issued final regulations clarifying that stock options and SARs will only qualify as performance-based compensation if granted under a stockholder-approved plan that includes an individual limit on the number of such awards that may be granted during a specified period. In addition, only certain types of stock-based compensation are eligible to be treated as “paid” when granted for purposes of qualifying for an exemption under the IPO transition rule. Read the full article. For more information about structuring individual limits for equity grants, please see this article in The Corporate Executive.

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Camp Tax Reform Proposal Could Impact Executive Compensation

On February 26, 2014, U.S. House of Representatives Committee on Ways and Means Chairman Dave Camp (R-MI) released the proposed Tax Reform Act of 2014 (the Camp Proposal), which would simplify the Internal Revenue Code and reduce corporate and individual tax rates. However, to remain revenue neutral, the Camp Proposal would eliminate many important tax incentives and would change the landscape of executive compensation. Changes to Nonqualified Deferred Compensation Most significantly, the Camp Proposal would add a new Internal Revenue Code Section 409B under which nonqualified deferred compensation earned after 2014 would be taxed upon the elimination of a substantial risk of forfeiture (typically, upon vesting). Further, under the Camp Proposal, amounts earned before 2015 would generally be includible in income as of the later of: (1) 2022 or (2) the year in which the amounts are no longer subject to a substantial risk of forfeiture. If these provisions are...

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