03 Jun 2025

Counting Wages: Applying Section 162(m) Limitations and Its Grandfathering Rule

Internal Revenue Code Section 162(m) generally limits to $1 million the tax deduction that a public corporation may take for compensation paid to certain top executives referred to as covered employees. Before the Tax Cuts and Jobs Act of 2017 (TCJA), corporations could qualify for a performance-based compensation exception to the limitation. Although this exception is generally not available for tax years beginning in 2018, the rules are still important for grandfathered arrangements, which are still eligible for the exception pursuant to the pre-amended statute. See Treas. Reg. § 1.162-33(g) (added under 85 Fed. Reg. 86481 (Dec. 30, 2020). Thus, performance-based compensation payments made under a grandfathered arrangement that meets the requirements will not be counted with the other compensation paid to these executives when determining if their pay exceeds the $1 million deduction cap for that year.

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