Beginning in 2027, Current Law Cover Employees and the following five highest-paid employees will include in a public company’s cover employees for the calendar year.
The American Institute of CPAs (AICPA) has provided reviews to the Department of the Treasury and the Internal Revenue Service (IRS) regarding the American Rescue Plan Act of 2021 (ARPA)’s modifications to section 162(m).
Furthermore, under Section 162(m) of the Internal Revenue Code, an openly traded company’s deduction for compensation to a covered employee is limited to $1 million. However, the recent addition of Section 162(m)(3)(C) by the ARPA expands the definition of a “covered employee” for taxable years starting after December 31, 2026. This growth imposes limitations on the deductibility of certain employee compensation.
In Current Law, Covered Employees and the five highest paid employees (the “ARPA 5”) will include in a public company’s covered employees starting in 2027 for calendar year taxpayers. Each year, the employees cover by ARPA 5 are subject to change, and unless they meet the conditions in that year or become Current Law Cover Employees, they are no longer cover employees.
The AICPA letter detects advice regarding covered employee classifications that require clarification. The items and suggestions are as follows:
I. Covered Representatives as ARPA 5 Workers
A covered employee under section 162(m)(3)(D) may include as one of the five highest-paid employees. Additionally, Under section 162(m)(3)(C) for a specific taxable year, according to guidance from the AICPA.
II. The AICPA’s recommendations for determining ARPA 5 – the definition of compensation:
The AICPA suggests that the Treasury and IRS issue guidance regarding the identification of ARPA 5 employees:
- Define compensation for identifying ARPA 5 employees in the same way that compensation is define for Current Law Cover Employees;
- Allow a publicly traded company to choose to define compensation for ARPA 5 as the total amount of compensation. Furthermore, Taxpayers can deduct the amount that would be deductible if the employer were a taxable U.S. corporation.
- In the first year that their deduction is limit for compensation pay to the ARPA 5, treat taxpayers as having made the choice to define compensation by how they apply the deduction limitation and identify the ARPA 5;
- Moreover, safeguards must be implemented to prevent taxpayers from changing the rules, ensuring fairness and integrity in the tax system.
- Consider the effects of mergers and acquisitions involving taxpayers who have made opposing votes.
Jan Lewis, chair of the AICPA Tax Executive Committee, stated, “Throughout the year, the AICPA works closely with the IRS. To ensure that tax law works for taxpayers and tax practitioners as well as the IRS.” Clear guidance is need to address identified issues with changes to section 162(m) for practical implementation of ARPA.
The tax laws are very complex. Our short blog articles cannot fully cover all the rules and nuances. Your specific facts may hold various opportunities and possible risks that only trained, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.
If you are a licensed tax professional interested in helping others either part or full-time, or ad hoc, come on in! Happy to have you. Our market has the full suite of tools to communicate with clients including compliance calendars, task and message management, and billing. You can also quickly connect to knowledgeable colleagues who can complement your services with the ones you do not provide. Register here.