Main Menu
Print PDF

Proposed Regulations Broaden Limitation on Compensation Deductions for Public Companies

Tax and Estates Alert | January 21, 2020
By: John Eagan and L. Stephen Bowers

Internal Revenue Code Section 162(m) generally limits the amount of compensation to certain individuals (Covered Individuals) that a publicly traded company may deduct as a business expense. The Tax Cuts and Jobs Act (TCJA) significantly modified the application of this limitation for taxable years beginning after December 31, 2017 for compensation arrangements entered into after November 2, 2017 (the Grandfathering Date). Proposed regulations (the Regulations) under the revised Code Section 162(m) were issued last month, and reflect the IRS’s position that the types of compensation now subject to the limitation will be interpreted broadly.

Prior to TCJA, Code Section 162(m) only applied to a company that issued “common equity securities” required to be registered under Section 12 of the Securities Exchange Act of 1934 (the 34 Act). TCJA broadened the types of companies that would be considered “publicly traded,” and therefore subject to Code Section 162(m). The Regulations provide guidance on this change. Specifically, under the Regulations, a company will be considered publicly traded if it (i) offers any class of securities which must be registered under Section 12 of the 34 Act; or (ii) is required to file reports under section 15(d) of the 34 Act. The Regulations explicitly note that certain large private C or S corporations that issue (for example) publicly traded debt, but are not themselves publicly traded, will become subject to Code Section 162(m). In addition, certain subsidiary or parent organizations of publicly traded companies will themselves be subject to Code Section 162(m) even if they have no publicly traded securities. Finally, the Regulation appears to undo pre-TCJA sub regulatory guidance which broadly exempted “foreign private issuers” from Code Section 162(m). Such entities are now subject to the same rules as described above.

Prior to TCJA, Code Section 162(m) provided an “IPO Transition Period” which stayed the application of the deduction limitation to a company for the first year in which it was publicly traded. The Regulations eliminate this transition period. A privately held company will become immediately subject to Code Section 162(m)’s limitations upon an IPO, or the issuance of any security which meets the requirements in the preceding paragraph.

The Regulations also provide that Code Section 162(m) will apply to a privately held corporation that becomes a publically held corporation beginning with compensation that is deductible for the taxable year ending on or after the date the corporation becomes a publically held corporation. The Treasury Department considered, but did not incorporate, any transition relief for compensation arrangements that existed during the period in which a corporation was not publicly traded.

The Regulations retain the concept of “grandfathering” for arrangements entered into prior to the Grandfathering Date. However, in order to be considered grandfathered, a compensation arrangement must be a legally enforceable right (i.e., a binding contract between the employer and employee) which (i) is not subject to employer discretion as to its payment (termed “negative discretion") and (ii) is entered into before the Grandfathering Date. It is important to note that the Regulations clearly indicate that, for purposes of applying the grandfathering rule, separate pieces of compensation may be reviewed independently, even if they are described in the same agreement. For example, the existence of a discretionary component of a bonus does not “taint” the potential grandfathering of a mandatory component. However, substantial modifications to otherwise grandfathered arrangements (other than certain specified changes required by Code Section 162(m) or Code Section 409A), may cause the arrangement to become immediately subject to the Regulations.

The Regulations contain a number of other changes, consistent with TCJA, which generally result in Code Section 162(m) applying to a broader swathe of companies, Covered Individuals, and compensation arrangements than under previous guidance.

If you have questions or would like further information, please contact L. Stephen Bowers (; 215.864.6247) or John Eagan (; 212.868.4835).

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
Back to Page