Share with your friends

United States – Update on H.R. 1 Provisions on Section 162(m)

United States – Update on H.R. 1 Provisions on Section

This report covers the changes affecting U.S. Internal Revenue Code section 162(m) in the recently enacted tax law, H.R. 1.


Related content


Originally named the Tax Cuts and Jobs Act, the recently signed tax reform law, H.R. 1 (“2017 Act”), makes several sweeping changes to section 162(m) of the U.S. Internal Revenue Code of 1986, as amended (the Code), which will impact publicly held corporations that maintain incentive-based compensation programs and similar arrangements for their key employees and executives.

This GMS Flash Alert updates our prior report on the same subject by summarizing those changes.  (For prior coverage, see GMS Flash Alert 2017-180 (December 7, 2017).)


The revisions under the 2017 Act effectively expand the scope of section 162(m) and eliminate important exemptions that previously applied to section 162(m).

This could make administrative information gathering more burdensome and affect compensation-related costs for employers, since the changes limit deductions going forward as well as eliminate the popular exception for performance-based compensation.  This could also lead to complicated tracking of existing arrangements that cross over the transition period – which we discuss below – as well as tracking payments to covered employees.

Overview of Pre-2017 Act Status in Brief

Section 162(m) generally limits to $1 million the amount of current compensation paid to a Named Officer (described as a “covered employee” in section 162(m)) that can be deducted by a publicly traded corporation in a taxable year.  Furthermore, under the original rules, the “performance-based compensation” exemption was the most important exemption from the impact of section 162(m).  If the incentive compensation plans are approved by shareholders and, except in the case of stock options and stock appreciation rights, subject to “objective performance goals” established by outside directors at the beginning of the period to which the performance relates, then generally the compensation is exempt from the section 162(m) limitations. 

For additional background, refer to GMS Flash Alert 2017-180 (December 7, 2017).

Key Changes under the 2017 Act

Many of the changes in their “proposed” form were passed into law, and readers may refer back to our earlier report, GMS Flash Alert 2017-180 (December 7, 2017).  In brief, the key changes include:

  • Expansion of section 162(m) to include CFOs in addition to chief executive officers (CEOs) and the next three highest compensated named executives.  
  • Once someone is identified as a covered employee (identified as of the 2017 tax year forward), the limitation continues to apply to payments made to that employee in all future years even if the employee would not otherwise be classified as a covered employee in such years, under the pre-2017 Act rules – thereby impacting severance pay and other arrangements that normally were not subject to section 162(m).  
  • Public companies subject to section 162(m) rules now will include certain foreign filers and potentially large private companies, as well as S corporations.  
  • Repeal the performance-based compensation exemption. 
  • A transition period under which section 162(m) expansion would not apply to compensation under a written binding contract in effect on November 2, 2017, that was not materially modified.


The 2017 Act revisions to section 162(m) represent a restriction of an employer’s ability to deduct for executive compensation to certain executives.  

Employers should consider whether existing arrangements may be grandfathered under the transition rule.

They may also wish to undertake benchmarking and compensation and benefits design review, as a way to help assure they are competitive in the marketplace. 


1  For the text and status of H.R. 1, click here

The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.

The information contained in this newsletter was submitted by the KPMG International member firm in the United States.

© 2020 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

For more detail about the structure of the KPMG global organization please visit

Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Connect with us


Want to do business with KPMG?


loading image Request for proposal