Corporate Tax Deductions for CEO Pay

In 1993, the U.S. Congress eliminated the corporate tax deduction (IRC 162(m)) for nonperformance based executive compensation over $1 million and established that CEO compensation in general had to be reasonable to be deductible for the corporation.

Reasonable Compensation

IRC 162 allows a deduction for reasonable compensation expense. The courts apply two tests to make the determination of reasonableness, the amount test and the intent test. Was the amount reasonable in relation to the services performed and was the money paid intended as compensation.

Incentive-Based Pay

Stock options are treated as performance-based compensation if certain conditions are met, such as performance goals based on objective standards, approved by a compensation committee and the stockholders before being paid. Stock options are considered performance-based because their value after issuance is tied to the performance of the stock.

Golden Parachutes

IRC Section 280G denies a deduction for any excess parachute payment. If an acquiring company makes the payment, IRC Section 4999 prevents the acquiring corporation from adding the payment amount to the tax basis of the acquired corporation.

References

• All Business: CEO bonus pay, tax policy, and earnings management.
• FindLaw: Executive Compensation Tax Issues