December 7, 2017 - Barack Ferrazzano Client Alert

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Proposed Tax Changes Would Expand Compensation Deduction Limit

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

Action Items

• Confirm with tax accountants any necessary steps to ensure that 2017 bonuses payable in 2018 will be deductible in 2017.
• Consider accelerating into 2017 payments to individuals (e.g., CFOs or 2016 covered executives who have terminated employment) who might become subject to the expanded 162(m).
• Consider which documents, if any, will satisfy the grandfather provision of the Senate bill.

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

• First, the bills would eliminate the performance-based compensation exception for tax years following 2017.
• Second, the bills would expand the group of executives covered by the $1 million limitation to include chief financial officers.
• Finally, the bills would require, beginning with 2018 tax years, that any executive covered by the limitation in any year beginning after 2016 remain subject to such limitation for all future years.

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.

We Can Help

Please call us if you would like to discuss any of these issues or if we can otherwise be of assistance.