IRS issues initial guidance on application of Code Section 162(m) as amended by the Tax Cuts and Jobs Act

On August 21, the Internal Revenue Service (IRS) issued Notice 2018-68 containing much-awaited interpretive guidance on Section 162(m) of the Internal Revenue Code as amended by last year's tax reform act (Tax Act), including the operation of the so-called "grandfather rule" and how "covered employee" determinations are to be made under the new Section 162(m).

The grandfather rule preserves the federal income tax deduction for certain compensation paid to covered officers of a public corporation under written binding contracts in effect as of November 2, 2017 if specified requirements are met. Under the new IRS guidance, the grandfather rule may have its greatest impact on the deductibility of compensation paid under arrangements in effect on November 2, 2017 to individuals who are covered employees under new Section 162(m), but who would not have been covered employees under Section 162(m) before it was amended.

The IRS guidance also addresses covered employee determinations under new Section 162(m) for officers other than the chief executive officer or the chief financial officer, and indicates that the corporation is to make these determinations without regard to whether an officer retains his or her position on the last day of the corporation's fiscal year. The guidance on covered employee determinations under new Section 162(m) departs from the SEC executive compensation rules on the determination of named executive officers for purposes of disclosure in a company's annual proxy statement. As a result, public companies will have to identify separately their officers for purposes of the two regulatory regimes.

Read More: IRS issues initial guidance on application of Code Section 162(m) as amended by the Tax Cuts and Jobs Act


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