Section 162(m) Tax Deduction Limit for Public Company Executive Compensation

Summary

This practice note provides an overview of the rules governing the executive compensation deduction limitation under I.R.C. § 162(m), as amended by the tax reform legislation enacted on December 22, 2017 (Pub. L. No. 115-97, § 13601) (2017 Tax Act), including final regulations issued pursuant to the 2017 Tax Act in 85 Fed. Reg. 86,481 (Dec. 30, 2020) (2020 Final Regulations). Section 162(m) generally imposes a $1 million limit on the annual deduction that a public corporation (or certain other reporting entity) may take for compensation paid to so-called covered employees. It is important for practitioners to understand these rules, including the full scope of the 2017 Tax Act amendments (which are effective for tax years beginning after December 31, 2017) and expanded covered employee definition under the American Rescue Plan Act of 2021 (effective for tax years beginning after December 31, 2026), to help their public and reporting company clients structure compensation packages for ...