WHAT DO YOU NEED TO KNOW?
IRS Notice 2018-68 gives guidance on how to apply the modifications made by the 2017 Tax Cuts and Jobs Act (TCJA) to IRC Section 162(m), which states that compensation of more than $1 million paid to “covered employees” of publicly held corporations is nondeductible.
Particularly, the TCJA amended Section 162(m) in three main parts. This includes:
1. Expanding the definition of “publicly held corporation”
2. Broadening the definition of “covered employee”
3. Eliminating the “performance-based” compensation exception
The amendments are generally applicable to taxable years starting after December 31, 2017. However, the amendments are not applicable to compensation that is payable pursuant to a legally binding contract in effect as of November 2, 2017, so long as the contract is not materially modified after this date; this transition relief is known as the “grandfathering rule.”
HOW WILL IT AFFECT YOU?
The notice will affect individuals within a “publicly held corporation” who fall under the newly expanded definition of a “covered employee.”
To be considered a “covered employee,” an individual must:
The “grandfathering rule” is employed in a nuanced manner, depending on the circumstances, but is generally narrowly construed.
The “grandfathering rule” may be applicable to:
WHAT CAN A&M TAXAND DO FOR YOU?
Although IRS Notice 2018-68 brings some clarity to the “grandfathering rule” of Section 162(m) as modified by the TCJA, applying its provisions can be complicated and tedious. As these regulations further develop, our Alvarez & Marsal Taxand team is uniquely positioned to determine which arrangements may still permit a compensation deduction in excess of $1 million for a covered employee under the rules as in effect prior to the enactment of the TCJA.
To learn more about our services, visit: https://www.alvarezandmarsal.com/expertise/tax