Tax Reform Impacts Deductibility of Executive Compensation

Congress recently passed sweeping tax reform legislation in the Tax Cuts and Jobs Act, and the President signed it into law on December 22, 2017. In addition to many other changes, some of which (such as the lower corporate tax rates) have been discussed at length in the media, the legislation makes significant changes to Internal Revenue Code Section 162(m). Section 162(m) imposes a $1 million per person limit on the federal income tax deduction that may be taken by a publicly held corporation for remuneration paid to certain senior executives each taxable year. The changes to Section 162(m) expand the categories of compensation subject to the limits and the persons and entities covered by the rule, so while corporations may enjoy lower tax rates under the new laws, deductions will be further limited in some instances.

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