• Expansion of Rule on Deduction of Compensation of Publicly Held Corporation Employees

    A publicly held corporation’s compensation deduction is limited to $1 million per year for compensation paid to any “covered employee.” ( Code Sec. 162(m)(1) ) Under pre-ARPA law, the definition of “covered employee” only includes the corporation’s principal executive officer, principal financial officer, the three other highest-paid employees, and anyone who was in one of those categories for any preceding tax year that begins after December 31, 2016. ( Code Sec. 162(m)(3) )

    New law.  For tax years that begin after December 31, 2026, the above rule is changed to provide that “covered employee” includes the eight other highest-paid employees, rather than the three other highest-paid employees. ( Code Sec 162(m)(3)(C) , as amended by ARPA Sec. 9708(3))

    However, the above rule regarding employees who were in one of the covered employee categories in preceding years, does not apply to employees who are covered employees only because of the new rule. ( Code Sec. 162(m)(3)(D) , as amended by Act Sec. 9708(4))

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