Business Deductions and Credits

What Changed

Executive Compensation

Prior to the 2017 tax reform reconciliation act, publicly-held companies were limited on the deductibility of compensation exceeding $1 million for covered employees under IRC Section 162(m).

The definition of a covered employee has been changed, and now includes the three highest-paid officers other than the principal executive officer and principal financial officer. Compensation now includes performance-based compensation, including severance and deferred compensation. There are certain exceptions under the grandfathered rule that allows employment contracts to apply the old IRC Section 162(m) rules.

Meal Expenses Deductions

Prior to 2017, entertainment and business meals relating to the taxpayers ordinary and necessary business expenses were subject to a 50% limitation on the deduction. Since the implementation of the TCJA, entertainment expenses paid or incurred after 2017 are 100% disallowed.  Certain fringe benefits offered to employees also now require additional review and benefit programs may need revisions.  Meal expenses are now generally limited to 50% limitation on the deduction.

Planning Opportunities

Review deferred tax assets and compensation arrangements, as well as specific changes to the rules related to executive compensation. Work with legal advisors as needed to achieve compliance with the current law and the grandfathering provisions. The grandfathering provisions limit the ability to modify existing employment agreements.

Tax reform made substantial changes to the way businesses now must manage their expenses, requiring additional scrutiny, increased data management and extra review of contract details.

More Resources


Alert
Employers that meet certain qualifications may be able to deduct their expenses for meals and snacks provided to employees. Our Alert has details.

Alert
The IRS’s Notice 2018-76 provides some clarity on the deductibility of business meal expenses.

Article
The IRS has provided clarification broadening the scope of application for the compensation deduction limitations outlined in IRC Section 162(m).