In December 2017, the Tax Cuts and Jobs Act was signed into law, and among other changes, reduced the corporate tax rate from 35% to 21%. The act also ended the performance-based exemption to IRC Section 162(m) and expanded the pool of employees to which it applied to include the CFO. In other words, companies will no longer be able to deduct compensation in excess of $1 million paid to their top 5 executives starting in the 2018 tax year.
In 1993, the amount of compensation that corporations could deduct from their taxable income was capped at $1 million for select executive officers (the CEO and the 3 highest paid officers, excluding the CFO). The then-fresh change to the tax code came with a loophole. If the compensation was considered performance-based, then it was exempt from the rule and could be deducted—even if the executive received compensation in excess of the $1 million limit.
January 23, 2018
By Matthew Goforth, Senior Governance Advisor, Equilar
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