IRS Proposes New Regulations To Clarify Section 162(M) Performance-Based Compensation Exemption


The IRS and Treasury Department have proposed new regulations under Section 162(m) of the Internal Revenue Code of 1986, as amended (“Code Section 162(m)”), relating to two aspects of the deduction limitation for certain executive compensation.1 The proposed regulations clarify that performance-based compensation attributable to stock options and stock appreciation rights (“SARs”) must specify the maximum number of shares with respect to which such awards may be granted to each individual employee. In addition, the proposals also clarify the scope of a transition rule for newly public companies. Comments on the proposed regulations must be received by September 22, 2011.

Code Section 162(m) Award Limitations for Stock Options and SARs

Code Section 162(m) denies a deduction to publicly held companies with respect to compensation paid to any covered employee to the extent that the amount of the employee’s remuneration for a taxable year exceeds $1,000,000 unless (among other exceptions) the compensation qualifies as “performance based compensation.”2 If the compensation is considered “performance-based” under Code Section 162(m), it may be deductible by the company even if it exceeds $1,000,000 for a taxable year.

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