Loss Of U.S. Compensation Deduction As IRS Narrows View On “Performance-Based” Exception

US compensation deductions for certain compensation payments are threatened by a recent IRS position that reverses a long-standing interpretation that certain bonus arrangements will qualify for an exception to the Code Section 162(m) deduction limitation for "performance-based" compensation.

Performance-Based Exception

Section Code 162(m) provides that, unless an exemption is available, a public company can generally not deduct more than $1 million in annual compensation paid to its CEO and other officers whose compensation must be disclosed in the annual proxy. (Foreign private issuers, who are not subject to the U.S. proxy disclosure rules, do not have any employees subject to this rule.) The most frequently used exemption is for "performance-based compensation" which applies so long as the compensation arrangement meets certain enumerated requirements and is payable solely if the performance