The American Institute of CPAs (AICPA) has submitted comments to the Department of the Treasury and Internal Revenue Service (IRS) related to changes made to section 162(m) by the American Rescue Plan Act of 2021 (ARPA).
Section 162(m) of the Internal Revenue Code places a $1 million limitation on the amount of remuneration with respect to a covered employee that a publicly held corporation may deduct in a taxable year. The ARPA added section 162(m)(3)(C), a new subsection to section 162(m), which will further limit the deductibility of certain employee remuneration by expanding the definition of a “covered employee” effective for taxable years beginning after December 31, 2026.
Beginning in 2027, for calendar year taxpayers, a public company’s covered employees will include Current Law Covered Employees as well as the next five highest paid employees (the “ARPA 5”). The employees included in the ARPA 5 are subject to change every year, and they do not remain covered employees in future years unless they meet the criteria in that future year or become a Current Law Covered Employee.
The AICPA letter identifies recommendations requiring clarification regarding covered employee classification. The items and recommendations are:
I. Covered Employees as ARPA 5 Employees
AICPA Recommendations:
The AICPA recommends that Treasury and the IRS issue guidance clarifying that a covered employee under section 162(m)(3)(D) may be included as one of the five highest paid employees...
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