IRS provides guidance on Section 162(m)(6) deduction limitations for tax-exempts

The IRS recently issued a chief counsel advice memorandum (CCA201752008) to provide guidance on the excessive worker remuneration deduction limit for tax-exempt entities that are part of an aggregated group with a covered health insurance provider under Section 162(m)(6). Covered health insurance providers are allowed to take a maximum deduction of $500,000 for each worker’s annual compensation, provided that the compensation meets certain requirements under Sections 162(m)(6)(D) and 162(m)(6)(E).

In the CCA, two corporations are related under Section 414(b). One corporation is a health insurer provider subject to Section 162(m)(6). The other corporation is a tax-exempt hospital. For covered health insurance providers treated as an aggregated group under Section 162(m)(6)(C)(ii), the $500,000 deduction limit per worker applies to all members of the group as a whole. If total compensation paid to a worker exceeds $500,000, Treasury Reg. Sec. 1.162-31(e)(4)(ii) provides that the $500,000 deduction limitation must be prorated among all members of the group based on the compensation attributable to each individual member.

According to the CCA, tax-exempt entities who are members of an aggregated group of covered health insurance providers are subject to the same proration rules. Tax-exempt entities must be allocated a portion of the deduction limitation, regardless of whether the entities have taxable income from which to take the deduction. This results in a lower amount of deductible compensation for the for-profit entities in the group.

Eddie Adkins Partner, Washington National Tax Office
T +1 202 521 1565

Jeffrey Martin
Partner, Washington National Tax Office
T +1 202 521 1526

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