The IRS Throws a Curveball – Expanding the Penalty Box under 162(m)
The IRS Throws a Curveball – Expanding the Penalty Box under 162(m)
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February 17th, 2025
Written by Frank Glassner, CEO
Veritas Executive Compensation Consultants
In a surprising twist of fate, the IRS has decided that too many executives are enjoying the high life without enough tax tabs. Under the flashy new amendments inspired by the American Rescue Plan Act of 2021, the IRS is no longer content with just the top brass's tax bills. Now, they're coming for the next five highest paid employees too. Starting post-December 31, 2026, these folks might find their compensation deductions in jeopardy if they break the $1M salary cap. Because, why should the CEO have all the fun?
Back to the Basics: Who’s Getting Tagged Out Now?
Originally, Section 162(m) of the IRC was like a velvet rope at a VIP event—only the top five execs (CEO, CFO, and three other lucky souls) got behind the curtain where their non-performance-based compensation over $1,000,000 wasn't tax-deductible. But why stop there? The IRS now wants to include the next five heavy hitters in this exclusive non-deductible club, regardless of whether they hold the top titles or just top salaries.
The Twist: Musical Chairs with Who’s Covered
Unlike the old days where being tagged once meant you’re always "it" for IRS purposes, the new rules play a different tune. The next five high rollers can change year to year, making the game of who’s who in the money seats even more thrilling. The IRS is keeping us on our toes, ensuring everyone gets a fair shot at the limelight (or is it the white-hot spotlight?).
A Closer Look at Who Counts as an 'Employee'
The definition of “Employee” has expanded too. It now includes anyone from direct employees to those lingering in subsidiaries and even contractors masquerading as employees. This way, no one can dodge the evil tax man by hiding under their subsidiary blanket.
What’s in a Number? - Everything!
Hey-it’s all about the dollars, of course. The IRS measures your worth by the compensation that could have been deductible, not necessarily what you earned while singing Kumbaya at the year-end company retreat.
Speak Now or Forever Hold Your Peace
The IRS is all ears until March 17, 2025. They’re throwing a public hearing where you can comment, sing your sorrows, or applaud the changes. After that, it’s game on for compliance, with the new rules swinging into full effect January 2027.
On Your To-Do List
- Start keeping tabs on who’s bringing in the big bucks;
- Consider strategic compensation planning to keep those tax deductions in check; and
- Look out for sectors like technology, energy, finance or entertainment where big paychecks are as common as office coffee runs.
Veritas is Here to Harmonize Your Compensation Plans
At Veritas Executive Compensation Consultants, we stay ahead of those curve balls (and change-ups too!) so you can navigate these changes without skipping a beat. Whether you need to re-tune your executive compensation strategies or harmonize shareholder relations, we’re here to ensure your plans hit home runs.
Get in touch with Veritas CEO Frank Glassner via email at fglassner@veritasecc.com or by phone at (415) 618-6060 (he’ll personally take your call) and let’s ensure your executive compensation arrangements are in the ballpark, even under the IRS’s new arrangements.
Bottom Line
Don’t get caught off-base. With Veritas by your side, you can win the World Series of Pay with confidence and keep your company’s batting average strong.
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