This article was originally posted on Kelley Drye’s Labor Days Blog.

IRC §162(m) limits a publicly held corporation’s ability to take a tax deduction for compensation paid to covered employees in excess of $1 million. As mentioned in our January 2018 Client Advisory, the Tax Cuts and Jobs Act (“Act”) repealed the exception to §162(m) for qualified performance-based compensation and expanded the applicability of §162(m) by broadening the definitions of covered employee and publicly held corporation. These changes generally apply to tax years beginning on or after January 1, 2018, but certain payments are exempt under a transition rule. The IRS recently issued Notice 2018-68 (“Notice”) to provide guidance on the identification of covered employees and the operation of the transition rule. This Client Advisory highlights some of the guidance provided.

Covered Executives
For purposes of determining covered employees for any tax year, the Act provides that any executive (i) who is the principal executive officer (“PEO”) or principal financial officer (“PFO”) of the publicly held corporation at any time during the taxable year, or an individual acting as such, or (ii) whose total compensation for the taxable year is required to be reported to shareholders under SEC rules by reason of such executive being among the three highest compensated officers for the taxable year (other than the PEO or PFO, or an individual acting in such capacity), is a covered executive. Moreover, any individual who was a covered employee for tax years beginning on or after January 1, 2017, remains a covered employee for subsequent tax years.

The Notice provides that an executive does not have to serve as an executive officer at the end of the taxable year to be a covered employee, and that an executive whose compensation is not required to be disclosed under SEC rules may nevertheless be a covered employee – e.g., where an employer delists its securities and does not have to file a proxy statement for the year in question or where an employer is subject to the scaled disclosure rules for smaller reporting companies or emerging growth companies. The Notice also provides that, for tax years beginning before January 1, 2018, covered employees are determined under pre-Act provisions.

To read the full advisory on the Kelley Drye website, click here.