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Heads up: Pending changes in Section 162(m) deductions

Internal Revenue Service notice of proposed rulemaking – Certain Employee Remuneration in Excess of $1,000,000 under Internal Revenue Code Section 162(m)

Section 162(m) of the Internal Revenue Code limits the deduction available to a publicly-held company for compensation in excess of an annual $1,000,000 to any employee.  An exception exists for “qualified performance-based compensation” paid upon achievement of pre-established performance goals.  Current regulations provide that compensation from stock options or stock appreciation rights (SARs) satisfies the performance goal requirement if, among other things, the option or SARs plan specifies the maximum number of shares which respect to which options and SARs may be granted during a specified period to any employee.

Regulations proposed by the IRS on June 24, 2011, hone the regulations to require that a plan specify the number of shares with respect to which options and SARs may be granted to any individual employee.  Consequently, a plan must carry a specific per employee limitation to meet the standard of Section 162(m) qualified performance-based compensation.

In the case of companies that transition to a new publicly-held status, the (to them) newly relevant Section 162(m) deduction will apply to options, SARs, or restricted stock if their grant occurred before the end of what is termed the applicable “reliance period.”  However, such a deduction will not be available in the case of phantom stock or restricted stock units.

The public comment period ends September 22, 2011, with adoption later this year.

Paul Creasy

This is a brief summary of the provisions of the new regulations, which may be found in the Federal Register at http://www.gpo.gov/fdsys/pkg/FR-2011-06-24/pdf/2011-15653.pdf

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