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December 18, 2020

BREAKING TAX NEWS | IRS issues final regulations on executive compensation under IRC Section 162(m)

The IRS issued final regulations (TD 9932) implementing changes made by the Tax Cuts and Jobs Act to IRC Section 162(m), which limits the deduction for certain compensation over $1 million for federal income tax purposes. The final regulations retain the basic approach of the proposed regulations (REG-122180-18, see Tax Alert 2019-2229) with certain revisions.

One particularly noteworthy change relates to compensation paid by partnerships. The proposed regulations would have treated a publicly held corporation's distributive share of a partnership's compensation deduction as compensation subject to the $1 million limit, subject to a grandfather rule for compensation paid pursuant to a written binding contract in effect on December 20, 2019, and not materially modified after that date. The final regulations provide additional transition relief for compensation paid by the partnership on or before December 18, 2020.

The final regulations generally apply to tax years beginning on or after the date the regulations are published in the Federal Register, although a taxpayer may choose to apply the final regulations to a tax year beginning after December 31, 2017, if the taxpayer applies them in their entirety and in a consistent manner. There are some specific applicability dates, but most of them were included in the proposed regulations.

A Tax Alert is forthcoming.