Tax reform proposal may significantly reduce business deductions for highly paid corporate executives.
Under the current law, deduction to highly paid covered employees of a public traded company is limited to $1 million per year. In other words, if a company pays $2.5 million. The company can only deduct $1 million of the $2.5 million. But here is the rub – there are exceptions.
1) Commissions
2) Performance-based compensation
3) Payments to a tax-qualified plan; and
4) Amounts that are excluded from the executive’s gross income.
If a company plans right, the $2.5 million paid to the executive will fall in any one of these four exceptions. And voila! All of the $2.5 million paid is deductable. It seems easy enough make the executive’s pay meet one or more of these exceptions… especially the first two.
The propose tax reform does two things – it eliminates the first two exceptions and “covered employee” will include CEO, CFO, and the three other highest paid employees. Large corporations will no longer be able to side step the $1M rule by creatively categorizing a CEO’s pay as commissions or performance base. These propose changes will affect the way corporate CEOs and other executives are paid.