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IRS Proposed Regulations Executive Compensation Limitation

The IRS has provided guidance to limit the tax benefits for excessive executive compensation in proposed rules recently issued on December 16. Initially, the 2017 TCJA limited the deduction for employee remuneration in excess of $1 million for publicly held corporations. The IRS is now proposing to clarify the parameters of that limitation.

The proposed regulations clarify the definition of a publicly held corporation to be any corporation that issues securities required to be registered under section 12 of the Exchange Act or that is required to file reports under section 15(d) of the Exchange Act. The proposed regulations expand the definition of a publicly held corporation to bring certain S corporations that fit a similar category within the limitation as well. The regulations propose that an S corporation is also publicly held if it (1) issues securities required to be registered under section 12(b) of the Exchange Act or (2) is required to file reports under section 15(d) of the Exchange Act.

The proposed regulations further provide that the amount of compensation used to identify the three most highly compensated executive officers is determined “pursuant to the executive compensation disclosure rules under the Exchange Act using the taxable year as the fiscal year for purposes of making the determination.”

Finally, when a privately held corporation becomes a publicly held corporation, Section 162(m) would apply to the deduction for any otherwise deductible compensation for the taxable year ending on or after the date that the corporation becomes publicly held.

The IRS has requested comments before February 18, 2020, and has scheduled a public hearing for March 9, 2020. [REG-122180-18, RIN 1545-BO95, 84 Fed. Reg. __ (Dec. 20, 2019)]

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