Proposed Regulations on 162(m) Deduction Limitation


Recently, the IRS issued proposed regulations concerning the $1 million deduction limitation for public company executive compensation, set forth in section 162(m) of the Internal Revenue Code. The proposed regulations clarify two important issues under the current rules, relating to:

• The requirements for compensation attributable to stock options or stock appreciation rights to qualify for an exemption from the deduction limit as "performance-based compensation"

• Application of the transition rule for privately held companies that become public

A brief summary of the proposed regulations is included below. If finalized during 2011, these regulations could apply to the 2011 tax year.

We recommend that public companies review their shareholder-approved equity compensation plan provisions now, to determine whether an amendment would be necessary under the rules as proposed. Additionally, public companies currently operating in a section 162(m) transition period should consider whether to limit equity-based award grants to the types of awards with more favorable transition treatment, as further explained below.

See full alert below for more information.

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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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