Certain Employee Remuneration in Excess of $1,000,000 Under Internal Revenue Code Section 162(m)
Published Date: 1/16/2025
Proposed Rule
Summary
The IRS is proposing new rules that limit how much publicly held companies can deduct on their taxes for paying employees over $1 million. These changes come from updates in the American Rescue Plan Act of 2021 and aim to tighten tax breaks for big executive paychecks. Companies and the public can share their thoughts by March 17, 2025, before the rules become final.
Analyzed Economic Effects
5 provisions identified: 0 benefits, 5 costs, 0 mixed.
Limit on Deductions Above $1,000,000
Publicly held corporations cannot deduct, for Federal income tax purposes, employee remuneration that exceeds $1,000,000 for a covered employee. This proposed rule implements section 162(m) and applies for taxable years beginning after the later of December 31, 2026, or the date the final regulations are published.
More Employees Become 'Covered' (Top Five)
The proposed regulations expand the definition of "covered employee" to include any employee who is one of the five highest compensated employees for the taxable year (other than the PEO or PFO). This expansion (section 162(m)(3)(C)) is effective for taxable years beginning after December 31, 2026 and increases the number of employees whose pay over $1,000,000 can be nondeductible.
Affiliates' Pay Aggregated and Prorated
For publicly held corporations, compensation paid by members of an affiliated group (including foreign subsidiaries and partnership distributive shares) is aggregated to determine the five highest compensated employees and the section 162(m) $1,000,000 limit. The proposed regulations require aggregation and prorate the nondeductible amount across group members (for example, $3,000,000 aggregate compensation can lead to $2,000,000 nondeductible that is allocated ratably among payors).
Third-Party Payors and PEOs Count as Compensation
The proposed regulations adopt the section 3401(c) definition of "employee," so an individual who is employed by another person (for example, a third-party payor or a professional employer organization) but performs substantially all services for the publicly held corporation is treated as the corporation's employee. Amounts paid to third parties to obtain those services are considered compensation for the corporation.
Controlled Foreign Corporations' Share Counts
The proposed regulations explicitly treat a publicly held corporation's pro rata share of amounts includible from a controlled foreign corporation (under sections such as 951(a)(1) and 951A) as compensation for purposes of section 162(m). This means certain CFC remuneration-related amounts are taken into account when applying the $1,000,000 deduction limit.
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