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Proposed Tax Changes Would Expand Compensation Deduction Limit

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Possible Revisions to Code 162(m) May Appear in Final Tax Bill.

Action Items

Given that proposals to expand Code Section 162(m) continue in the current passed bills, it appears likely some revision to 162(m) will make its way into the final tax bill. Therefore, companies concerned with the $1 million deduction limitation should at least consider the above action items. 

Elimination of Performance-Based Exception

Any final tax bill remains subject to negotiation by the U.S. House of Representatives and the U.S. Senate and therefore its final provisions are uncertain at best. The current version of the bill passed by each chamber would eliminate the performance-based exception to the Internal Revenue Code’s $1 million annual limitation on the deductibility of compensation paid to certain executives of publicly traded companies.

Both the House and Senate bills would expand Code Section 162(m) in three ways

The Senate bill does include a provision that would grandfather any written contracts in effect on November 2, 2017, provided such agreements are not later materially modified. Going forward, if these changes are enacted into law, compensation committees and boards will need to add to their considerations of compensation programs the loss of deduction for compensation in excess of $1 million.

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