Experts at ALI CLE Program Forecast the Future of Code Sec. 162(m) Planning

Jul 31, 2018 | Business Organization and Corporate Law, Taxation

The Tax Cuts and Jobs Act (TCJA) added major limitations on the deductibility of compensation paid to top executives of companies with publicly-traded securities. The $1 million limit in Code Sec. 162(m) on the deduction of compensation paid to covered employees has been “dramatically revised,”  remarked  Joseph  M. Yaffe, Esq. of Skadden, Arps, Slate, Meagher & Flom LLP in Palo Alto, CA.

Mr. Yaffe teamed with  Daniel  L.  Hogans, Esq. of Morgan, Lewis & Bockius LLP in Washington, D.C. to speak about the changes—and what to do about them. Appropriately called “The Latest Reincarnation (or Demise) of Section 162(m) Planning,” their session was part of an ALI-CLE program held in New York City on June 14-15. The program, “Executive Compensation 2018: Strategy, Design, and Implementation,” attracted compensation professionals from around the country.

The TCJA eliminated the exception for performance-based compensation noted Mr. Yaffe. This change turns Code Sec. 162(m) into a “hard” $1 million annual deduction limit for compensation paid to covered employees. And it’s expected to have a significant impact on compensation decisions going forward, such as by reducing the attractiveness of stock options.

Pre-TCJA law exempted performance-based compensation from the $1 million limit. Stock options satisfied the performance-goal requirement if: (1) the grant was made by the compensation committee; (2) the plan stated the  maximum  number  of  shares  for  which options could be granted to an individual employee; and (3) the employee’s compensation was based solely on an increase in the stock’s value after the date of grant.

Last chance for fiscal-year companies. The TCJA provision eliminating the performance-based exception is effective for tax years beginning after Dec. 31, 2017.  For calendar-year corporations, this change has already taken effect. For fiscal-year corporations, the pre-TCJA rules continue to apply for the tax year ending in 2018.

This provides an opportunity for fiscal-year corporations to nail down a deduction for performance-based compensation one last time. Whether compensation is deductible in the fiscal year  2018, and so is subject to the pre-TCJA rules, will depend on the all-events test and on Code Sec. 404 which governs the employer’s deduction for deferred compensation.  Under those rules, compensation paid more than 2½ months after the close of the employer’s tax year is presumed to be deferred.


This article was written by Scott Weiner and originally published in Thomson ReutersExecutive Compensation & Taxation Coordinator newsletter. To access the full article, download the pdf here.

Scott Weiner wrote this article as a result from his attendance at ALI CLE’s Executive Compensation 2018 annual conference. More information about this program can be found here: