Beginning in 2027, Current Law Covered Employees and the following five highest-paid employees will be included in a public company’s covered employees for the calendar year.

The American Institute of CPAs (AICPA) has provided feedback 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).

The amount of compensation a publicly traded company can deduct from its taxable income for a given year for a covered employee is limited to $1 million under Section 162(m) of the Internal Revenue Code. Section 162(m)(3)(C) was added to section 162(m) by the ARPA. This new section expands the definition of a “covered employee” for taxable years beginning after December 31, 2026, limiting the deductibility of some employee compensation.

Current Law Covered Employees and the five highest-paid employees (the “ARPA 5”) will be included in a public company’s covered employees starting in 2027 for calendar year taxpayers. Each year, the employees covered by ARPA 5 are subject to change, and unless they meet the criteria in that year or become Current Law Covered Employees, they are no longer covered employees.

The AICPA letter identifies recommendations regarding covered employee classifications that require clarification. The items and suggestions are as follows:

I. Covered Representatives as ARPA 5 Workers

AICPA Proposals:

A covered employee under section 162(m)(3)(D) may be included as one of the five highest-paid employees 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 defined for Current Law Covered Employees;
• Allow a publicly traded company to choose to define compensation for ARPA 5 as the total amount of compensation that the taxpayer would be able to deduct or as the amount that would be deductible if the employer were a taxable U.S. corporation;
• In the first year that their deduction is limited for compensation paid 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;
• Provide safeguards to stop taxpayers from changing the rules;
• 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.” In order to implement the ARPA changes in a way that is practical, future guidance should make it clear how to address the issues we’ve identified with the changes to section 162(m).

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, experienced, 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 marketplace 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.