Question

The $1 million maximum compensation deduction does not seem to have deterred large corporations from remunerating their executives at very high levels.

1. What techniques are being used to work around the millionaires’ provision?

2. Are executives taking pay cuts, or are their salaries being deferred or changed in nature due to § 162(m)?

3. How do you think companies should respond to the changes made to this area by the TCJA of 2017?

Give detailed answers.

Answer 1

Sec 162(m)

For the 2018 tax year, the covered employee group expands to anyone who serves as the CEO and/or CFO at any point during the year as well as the highest three paid employees (the “High Three”). The new law also provides that once an individual is identified as a covered employee after 2016, the individual is forever going forward a covered employee, even in years when the individual would not other wise meet the definition

Notice 2018-68 clarifies that amendments to section 162(m) under H.R. 1 do not apply to remuneration payable under a written binding contract that was in effect on November 2, 2017, and that is not modified in any material respect on or after such date. However, remuneration is payable under a written binding contract that was in effect on November 2, 2017, only to the extent that the corporation is obligated under applicable law (for example, state contract law) to pay the remuneration under such contract if the employee performs services or satisfies the applicable vesting conditions

material modifications: • A supplemental contract or agreement that provides for increased compensation or a payment of additional compensation (greater than a cost of living adjustment), if the additional compensation is paid on the basis of substantially the same elements as the compensation pursuant to the written binding contract • An accelerated payment of compensation that is not discounted for the time value of money • A modification for deferral of compensation where the additional amount paid (amount in excess of original deferral amount) is not based on a reasonable rate of interest or a predetermined actual Investment

a DTA should only be recognized for future compensation expense if a tax deduction is expected under the new rules or the arrangement is grandfathered under the transition rules.

-H.R. 1 section 162(m) rules would apply: ― A covered employee is the CEO and 3 highest compensated (not the CFO) ― Publicly traded does not include foreign issuers or delisted corporations ― Can use the last day rule for determining a covered employee ― Can use the performance-based compensation exception