IRS releases memorandum on definition of ‘covered employee’ under Section 162(m) November 24, 2015 Share Subscribe RFP In a recently released Chief Counsel Advice memorandum (CCA 201543003), the IRS addressed the definition of “covered employee” for purposes of Section 162(m). Under Section 162(m), a public company’s compensation deduction is limited to $1 million per year for each covered employee and a covered employee is defined in part by referring to the SEC’s disclosure rules for executive compensation. The SEC revised the rules for most public companies in 2006. In response to the new rules, the IRS issued Notice 2007-49 to clarify the definition of a covered employee. The term “covered employee” generally now includes the CEO as of the end of the taxable year and the three highest-paid officers, other than the CEO and the CFO. Accordingly, under the general definition of Notice 2007-49, a CFO isn’t a covered employee. In CCA 201543003, the IRS addressed how the definition of a covered employee applies to a small public company that is eligible to comply with the executive compensation disclosure requirements under the Securities Exchange Act of 1943 by satisfying the disclosure rules required of a smaller reporting company under Item 402(m) of Regulation S-K. Under Item 402(m) of Regulation S-K, the named executive officers required to be reported on the company’s proxy statement include all individuals who served as the CEO during the last fiscal year and the two highest-paid officers other than the CEO who served as officers on the last day of the last fiscal year. The IRS noted that the disclosure rules for smaller reporting companies don’t require disclosure of the compensation of an officer by virtue of the individual serving as the CFO. Instead, CFO compensation is disclosed only if the CFO is among the highest-paid two executives. Thus, the IRS explained in the memorandum that while the CFO is generally not included as a covered employee, the CFO of a smaller reporting company is a covered employee if he or she is one of the two ighest- paid officers other than the CEO who were serving as an officer at the end of the year. Please contact Eddie Adkins or Jeffrey Martin for more information. Tax professional standards statement This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.