The IRS issued final regulations (T.D. 9932) on 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. The rules finalized proposed regulations (REG-122180-18) issued last December.
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 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 exception for remuneration paid under a written binding contract that was in effect on Nov. 2, 2017, including when a contract will be considered materially modified so that it is no longer subject to the exception.
In general, the final 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 exception for remuneration paid under a written binding contract that was in effect on Nov. 2, 2017, including when a contract will be considered materially modified so that it is no longer subject to the exception; and the coordination of Sec. 409A with Sec. 162(m).
One change in response to a comment was to the rules covering corporate acquisitions. Under the proposed regulations, if an acquiring corporation acquires at least 80% of the operating assets (determined by fair market value on the date of acquisition) of a publicly held target corporation, then the target corporation is a predecessor of the acquiring corporation. The IRS adopted a suggestion that the final regulations clarify that the operating assets refer to gross operating assets instead of net operating assets.
Generally, the regulations apply to compensation that is otherwise deductible for tax years beginning on or after they are published in the Federal Register. Taxpayers generally may also apply the regulations in tax years beginning after Dec. 31, 2017, and before the date they are published, provided the taxpayer applies the regulations in their entirety and in a consistent manner. However, a number of special effective dates apply for certain transition rules related to the date the proposed regulations were published on the Federal Register (Dec. 20, 2019) and to amounts that were subject to the old rules.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.