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 2017 tax reform legislation known as the Tax Cuts and Jobs Act (Pub. L. No. 115-97) (TCJA) and the American Rescue Plan Act (Pub. L. No. 117-2) (ARPA), § 9708). 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 TCJA amendments (which are effective for tax years beginning after December 31, 2017) and expanded covered employee definition under ARPA (effective for tax years beginning after December 31, 2026), to help their public and reporting company clients structure compensation packages for senior executives that can mitigate adverse tax treatment under Section 162(m).