Tax Reform: IRS Issues Guidance on Section 162(m)

On August 21, 2018, the Internal Revenue Service (“IRS”) issued Notice 2018-68 (the “Notice”), which provides initial guidance on the application of Section 162(m) of the Internal Revenue Code, as amended by the 2017 Tax Cuts and Jobs Act (“TCJA”). 

The guidance is limited to the definition of the term “covered employees” and the application of the transition rule accompanying the TCJA amendments. Certain aspects of the Notice will be of practical significance for many companies in connection with the potential deductibility of their executive compensation, even though the amount of the lost deductions may not be material to each company from a financial perspective. 

The Notice states that the IRS plans to issue further guidance in the form of proposed regulations and solicits comment on certain aspects of Section 162(m) as amended that are not addressed by the Notice.