On December 20, 2019, the Internal Revenue Service (IRS) issued proposed regulations under Internal Revenue Code section 162(m). This section limits the annual compensation expense deduction available to publicly traded companies to $1 million for certain “covered employees.” Once finalized, the proposed regulations will implement the amendments made to Code section 162(m) by the Tax Cuts and Jobs Act (2017 Tax Act).


Prior to the 2017 Tax Act, Code section 162(m) limited the annual compensation deduction expense available to publicly traded companies to $1 million per “covered employee” (i.e., the CEO and the next three highest paid employees, other than the CFO). Compensation in excess of $1 million was available for a deduction only if it met the exception requirements for certain commission and performance-based compensation paid to the “covered employee.”

2017 Tax Act Modification of 162(m) Deduction Limit

The 2017 Tax Act modified the Code section 162(m) deduction limit in several significant ways.

  • The exception for commission and performance-based compensation was repealed.
  • The definition of “covered employee” was expanded to cover CFOs.
  • The categories of public companies subject to the deduction limit was expanded. Previously, Code section 162(m) applied only to companies with a registered class of securities. It now also applies to any company that is required to file public reports with the Securities and Exchange Commission (SEC).
  • Beginning with those persons who are covered employees for 2017, once an individual becomes a covered employee, he or she remains a covered employee forever.

The new rules became effective for tax years beginning after Dec. 31, 2017. However, the 2017 Tax Act provided that compensation paid pursuant to a “written binding contract” in effect on Nov. 2, 2017, and not materially modified thereafter, is grandfathered and can continue to qualify for the performance-based compensation exception, assuming all other Code section 162(m) requirements are met.

IRS Notice 2018-68

In 2018, the IRS provided initial guidance regarding covered employees and the application of the grandfathering rules.

Proposed Regulations Summary

Following is a chart summarizing the key aspects of the proposed regulations: