The American Institute of Certified Public Accountants (AICPA) submitted feedback to the U.S. Treasury Department and the Internal Revenue Service (IRS) on changes made by the Tax Cuts and Jobs Act (TCJA) related to executive compensation.
AICPA’s concerns relate to a couple of different areas of the TJCA. Specifically, TCJA places a $1 million limitation on the amount of compensation that a “publicly held corporation” can deduct in a taxable year for a “covered employee.” A “covered employee,” as defined by the TCJA, was broadened to include the principal executive officer (PEO) and principal financial officer (PFO) at any time during the year and not just on the last day of the year as was previously the case.
The TJCA also mandates that if an individual is a covered employee of the employer or any predecessor employer in any tax year, then they are a covered employee in all future years. Further, the TCJA repealed the exceptions for qualified performance-based compensation and commission-based compensation. Additionally, the act expanded the definition of a publicly held corporation to include certain foreign corporations, as well as private corporations and S corporations.
AICPA recommended that the Treasury and IRS provide guidance defining the term “predecessor employer” for purposes of determining who is a covered employee. The association also asked the agencies to provide taxpayers with a safe harbor method for calculating compensation to determine the three highest-paid officers other than the PEO and PFO. AICPA is also seeking guidance on which employees are considered officers of a publicly held company.
Also, AICPA recommended that the Treasury and IRS allow transition relief in instances related to becoming a publicly held corporation and for nonqualified deferred compensation plans with set formulas.