Punishing the Victim: IRC §162(m) and the Limitation on Deducting Executive Compensation

(Source) The phenomenon of punishing the victim is unfortunately a familiar one. Too often, a person in need of protection discovers that those whose ostensible task it is to assist not only do not offer the necessary protection but in fact exacerbate the harm. Here is a current example. Section 162(m) of the Internal Revenue Code provides that a publicly held corporation may not deduct compensation in excess of $1,000,000 paid to its principal executive office, its principal financial officer, or any of its three other most highly compensated employees (if the compensation paid to that employee is required to be reported to its shareholders under the Securities Exchange Act of 1934). Until 2017, IRC §162(m) was fairly easy to avoid as it did not apply to performance-based compensation: bonuses, stock options, and so forth. However, the 2017 Tax Cuts and Jobs Act eliminated this escape route. Today, regardless of how the compensation package is structured, the corporation can deduct a maximum of $1,000,000 for each of its covered employees. Underlying IRC §162(m) is the concern that the entrenched power of corporate management and the lack of effective oversight foster excessive executive compensation. The issue addressed by this provision is [read more]

Who Gets the Big 199A Tax Loophole?

In December 2017, Congress signed the Tax Cuts and Jobs Act (TCJA) into law. It was largely unpopular for most Americans but has left some people and companies quite pleased—the ultra wealthy ones like the Koch Brothers and Pfizer. The TCJA has lowered the individual income tax from 39.6% to 37%, lowered the corporate income tax from 35% to 21%, and doubled the estate tax’s exemption to $11 million per person and $22 million per couple. One of the most glaring issues with the TCJA comes from a loophole created in the Internal Revenue Code section 199A Qualified Business Income. Corporate income is a type of business income that is taxed twice federally, once at the corporate level and once at the shareholder level. However, pass-through income is a type of business income that skips the corporate level tax and jumps straight into the owner’s personal tax returns. Section 199A potentially allows a major tax deduction for certain “qualified” pass-through income. One question is who will qualify for this deduction, the majority of Americans or only the wealthiest among them—my pennies are on the latter. 199A—Some of What is Known The new law offers a 20% deduction for pass-through entities, [read more]