The Tax Cuts and Jobs Act (the Act) significantly changed the executive compensation deduction rules under Code Section 162(m) (Section 162(m)) and eliminated the performance-based compensation exception to the $1 million limit on the deductibility of annual compensation paid to certain “covered employees” (the performance-based compensation exception).
The Act includes a transition rule under which the changes to Section 162(m) will not apply to compensation payable pursuant to a written binding contract that was in effect on November 2, 2017 and is not materially modified after that date. There are a number of questions as to the application of the transition rule. For example, what is the meaning of “in effect?” What common plan features may prevent a plan from being eligible for the transition rule (e.g., clawback provisions, prospective termination provisions, negative discretion provisions, etc.)?
On February 7, 2018, the Treasury Department and the IRS issued an update to their joint 2017-18 Priority Guidance Plan (PGP). The PGP includes projects the Treasury and IRS hope to complete during the twelve-month period from July 1, 2017, through June 30, 2018. Most of the projects do not involve the issuance of new regulations, but rather guidance to taxpayers in the form of notices, revenue rulings, etc. Importantly, the PGP includes projects relating to the implementation of the Act, including guidance under Section 162(m) regarding the effective date of the provisions relating to the elimination of the performance-based compensation exception. The PGP also references guidance for Section 162(m) as a general project.
Additionally, the Joint Committee Staff of Congress, in consultation with the staffs of the House Committee on Ways and Means and the Senate Committee on Finance, is currently preparing an additional explanation of the Act (Bluebook), which is anticipated to be released later this year.
It is hoped that this pending guidance will help resolve many of the open questions regarding the Code Section 162(m) changes, including the scope of the available transition relief.