On June 23, 2011, the IRS issued proposed regulations under Section 162(m), which limit the deduction for compensation paid to certain public company executive officers. The proposed regulations would significantly modify the transition rule that applies to the preexisting equity plans of private companies that become public. The proposed regulations also reinforce the rule that individual award limits must be stated in a Section 162(m) compliant equity plan.

Section 162(m) generally disallows a deduction for annual compensation in excess of $1,000,000 paid to a “covered employee” (the principal executive officer (the CEO) or one of the three highest paid executive officers other than the principal executive officer or the principal financial officer of a public company). Compensation for this purpose generally includes all remuneration for services performed by the covered employee, whether or not the services were performed during the same taxable year.