IRS narrows performance-based compensation exception

✍ Scribed by Shirley Dennis-Escoffier

• Publisher: John Wiley and Sons
• Year: 2011
• Tongue: English
• Weight: 109 KB
• Volume: 23
• Category: Article
• ISSN: 1044-8136
• DOI: 10.1002/jcaf.21728

✦ Synopsis

The Internal Revenue Service recently issued proposed regulations to clarify the definition of deductible performancebased compensation paid to highly compensated officers. These regulations state that a plan awarding stock options or stock-appreciation rights that does not specify a limit on the maximum number of shares that can be granted to an individual employee will not qualify for the performancebased exception, resulting in the disallowance of a tax deduction for that employee's compensation in excess of the $1 million limit. The proposed regulations also address compensation paid under a plan that existed when the corporation was not publicly held. Although the IRS claims that it is simply providing clarification, many practitioners have complained that these new regulations narrow the definition of compensation that will qualify for the performance-based exception. Corporations should review their employment agreements and performance plans to ensure that the deduction for this performance-based compensation is not lost.