New Proposed Rules under IRC Section 162(m)
The Internal Revenue Service (the “IRS”) has proposed regulations regarding three elements of its existing regulations under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) with respect to stock-based compensation. Generally, Section 162(m) of the Code imposes a corporate deduction limit of $1 million annually on certain compensation paid to certain employees of public companies (generally the named executive officers of the company listed in the proxy, other than the principal financial officer). Section 162(m) of the Code features a number of widely used exemptions to this deduction limit, including (1) with respect to non-public entities which become public entities, equity compensation granted during a limited transition period pursuant to a plan or agreement in place prior to a company becoming publicly held (whether through an initial public offering of its equity securities or otherwise) and (2) compensation that meets the criteria of “qualified performance based compensation.” The proposed regulations clarify the application of these two exemptions as described more fully in this Firm Memorandum.