IRS Issues New 162(m) Guidance -

August 21, 2018, the Internal Revenue Service (the “IRS”) issued Notice 2018-68 (the “Notice”) which provides initial guidance and clarification on amendments made to Section 162(m) of the Internal Revenue Code (“Section 162(m)”). The Notice is narrowly tailored to address issues relating to the identification of covered employees and the operation of the grandfather rule, including when a contract will be considered materially modified so that it is no longer grandfathered. In addition, the guidance provided under the Notice is less favorable than many practitioners expected.

Generally, Section 162(m) imposes a $1,000,000 deductibility limit on compensation paid to a “covered employee” (as defined below) of a “publicly held corporation,” for any taxable year, subject to certain exceptions. As we reported here, the Tax Cuts and Jobs Act (the “TCJA”) made significant amendments to Section 162(m) which consisted of: (1) the elimination of the qualified performance-based compensation and commissions exclusions from the definition of “applicable employee remuneration;” (2) the expansion of the definition of “covered employee;” and (3) expanding the definition of “publicly held corporation” to include any company which is an issuer (a) the securities of which are required to be registered under Section 12 of the Securities Exchange Act if 1934, as amended (the “Exchange Act”), or (b) that is required to file reports under Section 15(d) of the Exchange Act, such as issuers of debt securities or foreign private issuers. The TCJA also provided a transition rule applicable to certain outstanding arrangements (commonly referred to as the grandfather rule).The changes to Section 162(m) under the TCJA apply to tax years beginning after December 31, 2017. Under the grandfather rules the amendments to Section 162(m) do not apply to remuneration which is provided under a written binding contract that was in effect on, and not modified in any material respect on or after, November 2, 2017.