Tax Code Tightens: Bill Expands $1 Million Cap on Deductible Executive Pay, Effective After 2024

A piece of legislation called the "Stop Subsidizing Multimillion Dollar Corporate Bonuses Act" is looking to change how much companies can deduct from their taxes for high-earner pay. Specifically, it's tweaking Section 162(m) of the Internal Revenue Code, which currently limits publicly held corporations from deducting more than $1 million per year for what they pay certain top executives. This bill aims to broaden who counts as a 'covered individual' and which companies are considered 'publicly held' for these rules, and these changes would kick in for tax years starting after December 31, 2024.

More Execs in the Spotlight: Redefining 'Covered Individual'

So, who exactly gets 'covered' by this $1 million deduction cap? The bill expands this definition significantly. It's not just about the current CEO, CFO, or the top three highest-paid officers anymore. The new definition will include anyone who performs services for the company after December 31, 2020. Plus, it brings in individuals who were a principal executive or financial officer, or one of the three highest-paid officers, at any point between the end of 2016 and the start of 2021.

Think of it this way: if a former top exec who left in early 2021 still does some consulting work for their old company, that company might now find that compensation also subject to the $1 million deductibility limit, even if that person isn't in a day-to-day leadership role. This widens the net considerably, potentially impacting how companies structure compensation for a broader group of high earners or former key players.

Casting a Wider Net: Which Companies Are 'Publicly Held'?

The bill also adjusts what 'publicly held corporation' means under Section 162(m)(2). It proposes to include companies that are required to file reports under Section 15(d) of the Securities Exchange Act of 1934 during the three-taxable-year period leading up to the tax year in question. In plain English, this means companies that might not have their stock listed on a major exchange but still file regular financial reports with the Securities and Exchange Commission (SEC) could now fall under this $1 million executive pay deduction limit. Previously, they might not have been subject to this particular rule, so it's an expansion of which corporate entities need to pay attention.

Keeping it Airtight: The Treasury's New Rulebook

To make sure these changes stick, the bill gives the Secretary of the Treasury the authority to issue regulations and guidance. This includes creating rules to prevent companies from trying to get around these limits, for example, by channeling compensation through other entities or partnerships. While giving regulators power to close loopholes is common, this is a broad authorization. It means businesses will need to watch for new Treasury rules that will clarify exactly how these expanded definitions and anti-avoidance measures will work in the real world, potentially affecting tax planning and executive compensation strategies down the line. The goal here is clearly to make the $1 million cap more robust, but the specifics of enforcement will unfold as those new regulations are developed.