IRS Changes Position on Performance-Based Compensation for Public Companies

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The Internal Revenue Service (IRS) has taken a new position under Section 162(m) of the Internal Revenue Code as it relates to the deductibility by a public company of “qualified performance-based compensation” paid to its highly compensated employees.

Section 162(m) of the Internal Revenue Code limits a public company’s ability to deduct compensation to the company’s Chief Executive Officer and its other four highest-compensated employees. That limit is $1 million for each such employee per year. A public company can deduct in excess of that $1 million amount if it pays the compensation to such employee in the form of “qualified performance-based compensation,” as defined under rules set forth in Section 162(m).

This new position by the IRS changes its historical position regarding one of those rules.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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