Section 162(m) Performance-Based Compensation Checklist

Summary

Section 162(m) of the Internal Revenue Code generally limits to $1 million the tax deduction that a public corporation may take for compensation paid to certain top executives referred to as covered employees. I.R.C. § 162(m). This checklist summarizes how corporations could qualify for the performance-based compensation exception to application of Section 162(m) prior to the tax reform legislation signed into law on December 22, 2017 (Pub. L. No. 115-97) (the 2017 Tax Act). Although this exception is generally no longer available for tax years beginning in 2018, these rules are still important for grandfathered arrangements, which are still eligible for the exception pursuant to the pre-amended statute. See Treas. Reg. § 1.162-33(g) (added under 85 Fed. Reg. 86,481 (Dec. 30, 2020) pursuant to the 2017 Tax Act). Thus, performance-based compensation payments made under a grandfathered arrangement that meets the requirements described below will not be counted with the other compensation paid to these executives when determining if their pay exceeds the $1 million deduction cap for that year.