Final Section 162(m) Rules Clarify Limits On Companies' Ability To Deduct Executive Pay

On December 18, 2020, just over one year after proposed regulations were released, the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury) finalized regulations implementing the changes to Section 162(m) of the Internal Revenue Code made by the 2017 Tax Cuts and Jobs Act (TCJA). Section 162(m) generally disallows a tax deduction for compensation paid in excess of $1 million in any taxable year to certain current and former executive officers (covered employees) of publicly held corporations. The TCJA expanded the scope of Section 162(m), and thus made more compensation nondeductible, by eliminating exceptions (most notably, for certain qualifying performance-based compensation) and by broadening the scope of entities and employees covered by Section 162(m). The proposed regulations issued by the IRS and Treasury in December 2019 fleshed out a number of the details of TCJA. The final regulations largely follow the proposed regulations, but