Section 162(m) of the Internal Revenue Code limits the amount of compensation exceeding $1 million paid to certain employees that is deductible when determining taxable income for federal income tax purposes. The amount of compensation subject to this federal limitation is recognized as an expense for financial reporting purposes, but does not have a future tax consequence, resulting in a permanent difference between income reported for accounting purposes and taxable income. Determining whether amounts of compensation recognized for financial reporting purposes in the current period may be subject to the Section 162(m) limitation in future taxable periods may be challenging, but it is necessary to determine whether such amounts give rise to temporary or permanent differences under ASC 740, Income Taxes, and how these amounts may impact an entity’s effective tax rate.
Snapshot 2025-07, “Accounting implications of IRC §162(m) limitations,” discusses the limitations for compensation exceeding $1 million paid to certain employees that can be deducted when determining taxable income for federal income tax purposes under IRC Section 162(m), including how the revisions under the Tax Cuts and Jobs Act and the American Rescue Plan Act impact financial reporting.
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Graham Dyer
Partner, Accounting Principles Group, Grant Thornton LLP
Principal, Grant Thornton Advisors LLC
Graham Dyer serves as Grant Thornton LLP’s Chief Accountant. In this role, he leads the firm’s national Accounting Principles Group, which is responsible for Grant Thornton’s interpretation of accounting matters in both US Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS).
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April Little
National Principal-in-Charge, Tax Accounting and Financial Reporting ESG & Sustainability Services Tax Leader
Principal, Grant Thornton Advisors LLC
April Little is national principal-in-charge, Tax Accounting and Financial Reporting, based in our Houston office. Little specializes in accounting for income taxes under U.S. and international accounting and financial reporting standards.
Houston, Texas
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