In REG-122180-18, the IRS issued proposed regulations under Sec. 162(m), which disallows a deduction by any publicly held corporation for employee remuneration paid to any covered employee to the extent that the employee's remuneration for the tax year exceeds $1 million.
Sec. 162(m) was amended in 2017 by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. The amendments changed the definition of covered employees, broadened which publicly held corporations are subject to the law, and eliminated the exception from the $1 million limit for remuneration payable on a commission basis and qualified performance-based compensation. The amendments generally apply to tax years beginning after Dec. 31, 2017, but under a grandfather rule, they do not apply to remuneration paid under a written binding contract that was in effect on Nov. 2, 2017, and was not modified in any material respect on or after that date.
In August 2018, the IRS issued Notice 2018-68, which provided guidance on the amended rules for identifying covered employees and on the operation of the grandfather rule, including when a contract will be considered materially modified so that it is no longer grandfathered. The notice also asked for comments on certain issues, which were considered in promulgating the proposed regulations.
In general, the proposed rules address the following subjects: the definition of "publicly held corporation"; who is a covered employee; what is included in applicable employee remuneration; the application of Sec. 162(m) to privately held corporations that become publicly held; the details of the grandfather rule, including when a contract will be considered materially modified so that it is no longer considered "grandfathered"; and the coordination of Sec. 409A with Sec. 162(m).
Generally, the regulations are proposed to apply to compensation that is otherwise deductible for tax years beginning on or after Dec. 20, 2019, the date they were published in the Federal Register. Taxpayers may rely on them until the applicability date of the final regulations, provided that taxpayers apply the proposed regulations consistently and in their entirety. Special effective dates apply to the provision of the regulations regarding the definition of covered employee, the definition of predecessor of a publicly held corporation, the definition of compensation, the application of Sec. 162(m) to a deduction for compensation otherwise deductible for a tax year ending on or after a privately held corporation becomes a publicly held corporation, and the definitions of written binding contract and material modification.