IRS Releases Initial Guidance on the 2017 Amendments to the Internal Revenue Code’s Limitation on Deduction for Certain Executive Compensation: Notice 2018-68 Provides Guidance on the Application of the Internal Revenue Code Limitation on the Deduction for Certain Executive Compensation, Including Clarification of Definitions of “Covered Employee,” “Publicly Held Corporation” and Grandfathered Arrangements

Sullivan & Cromwell LLP - August 23, 2018
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The IRS released Notice 2018-68 (the “Notice”) on August 21, 2018, which provides initial guidance on changes made to the Internal Revenue Code (the “Code”) limitation on the deduction for certain executive compensation, including a transition rule with respect to arrangements that were grandfathered under the prior tax regime.
 
Section 162(m) of the Code generally imposes a $1 million deductibility limit on compensation paid to “covered employees” of a “publicly held corporation” for any taxable year, unless an exception applies. Section 162(m) was significantly amended by the Tax Cuts and Jobs Act of 2017, which removed a long-standing exemption for certain performance-based compensation, expanded the definitions of “covered employees” and “publicly held corporation” and also provided a transition rule applicable to certain arrangements outstanding as of November 2, 2017, referred to as the “grandfather rule.” The Notice provides guidance on the amended rules for identifying “covered employees” and a “publicly held corporation” and the operation of the grandfather rule.