1. Compensation and benefits tax: executive compensation

2. EXECUTIVE COMPENSATION I.R.C. § 162 The fundamentals
162(a): There shall be allowed as a deduction all the ordinary and necessary expenses incurred during the taxable year in carrying on any trade or business, including:
162(a)(1): a reasonable allowance for salaries or other compensation for personal services actually rendered

3. EXECUTIVE COMPENSATION I.R.C. § 162 What is Reasonable Compensation?
The answer we solve for then is:
The value of reasonable services is the amount that would ordinarily be paid for like services by like enterprises under like circumstances
How to determine? Facts and Circumstances

4. EXECUTIVE COMPENSATION I.R.C. § 162 What is Reasonable Compensation?
Example "reasonable compensation" factors from RTS Investment Corp. v. Comm'r, 877 F.2d 647 (8th Cir. 1989):
The prevailing rates of compensation for comparable positions in comparable employers
Nature and scope of the employee's work
The employee's qualifications
Compensation paid in prior years
General economic conditions
Size and complexity of the employer's business

5. EXECUTIVE COMPENSATION I.R.C. § 162 What is Reasonable Compensation?
I.R.C. § 162(m)(1):
In the case of any publicly held corporation, no deduction shall be allowed under this chapter for applicable employee remuneration with respect to any "covered employee" to the extent that the amount of such remuneration for the taxable year exceeds $1,000,000.
I.R.C. § 162(m)(3):
"Covered Employee" is CEO of public company or any officer whose compensation is required to be reported on the company's proxy because they are one of the four highest compensated officers

6. EXECUTIVE COMPENSATION I. R. C
EXECUTIVE COMPENSATION I.R.C. § 162 Bonuses The "However" to the $1 million cap
An employer may deduct a bonus if bonuses plus salaries do not exceed reasonable compensation
No deduction is allowed if the bonus is a disguised dividend
Compensation payments that are bonus-heavy and salary light
Bonuses that are paid in exact proportion to the employees' stockholdings
Bonuses that do not relate to specific or unusual duties performed by the employee – must relate to exceptional and outstanding job performance
Bonus is a "significant increase" from one year to the next
"Significant Increase" means a departure from the from the employer's usual annual bonus practices

7. EXECUTIVE COMPENSATION I.R.C. § 162 What is Reasonable Compensation?
I.R.C. § 162(m)(4)(C): the $1 million cap does not include compensation that is performance-based. Applies if:
Performance goals determined by compensation committee of the board of directors, which has 2 or more "outside directors"
The terms of the "performance goals" are disclosed to shareholders and approved by a majority shareholder vote; and
Before payment, comp committee verifies that performance goals met

8. EXECUTIVE COMPENSATION I.R.C. § 162 What is Reasonable Compensation?
I.R.C. § 162(m)(4)(C): the $1 million cap does not include compensation that is performance-based. Applies if:
Performance goals determined by compensation committee of the board of directors, which has 2 or more "outside directors"
The terms of the "performance goals" are disclosed to shareholders and approved by a majority shareholder vote; and
Before payment, comp committee verifies that performance goals met

9. EXECUTIVE COMPENSATION I. R. C
EXECUTIVE COMPENSATION I.R.C. § 162 Example of 162(m) and the interplay with Reasonable Compensation?
Example: In one year, Big Public Company pays its Executive $1,200,000; $600,000 of which is base salary, and $600,000 of which is Restricted Stock. Two outcomes:
If none of that $1,200,000 compensation is not performance-based, then the company will lose a deduction of $200,000 because the compensation exceeded the $1,000,000 cap on compensation
If > $200,000 compensation is performance-based, then can take the whole deduction

10. EXECUTIVE COMPENSATION I.R.C. § 280G "Parachute Payment" Defined
I.R.C. § 280G(b)(2)(A)(i): "Parachute Payment" means payment contingent on change in control if:
There is a change in the ownership or effective control of the corporation, or
There is a change in the ownership of a substantial portion of the assets of the corporation, AND
The aggregate present value of the payment owed is equal to or exceeds an amount equal to three times the base amount

11. EXECUTIVE COMPENSATION I.R.C. § 280G Excess Parachute Payments
280G denies a deduction for certain payments that are contingent on a change in control if those payments are "excess parachute payments."
"excess parachute payments"
Payments in the nature of compensation
Ex: Performance-based compensation, such as outstanding options, attributable to performance before the change in control is compensation, calculated as the amount earned subtracted from the accelerated value of the vested option, if ascertainable at the time of change in control

12. EXECUTIVE COMPENSATION I. R. C
EXECUTIVE COMPENSATION I.R.C. § 280G Golden Parachute Payments to Disqualified Individuals
Reportable as on Form 1099-MISC in Box 7 as Nonemployee Compensation
A "disqualified individual" (i.e., one who is not eligible to receive a "Golden Parachute Payment") is one who at any time during the 12-month period prior to, and ending on, the date of the change in ownership or control was, (1) an employee or independent contractor, and (2) was (if in regard to a corporation) a shareholder, an officer, or a highly compensated individual of a small business corporation defined at § 1361(b)

13. EXECUTIVE COMPENSATION I. R. C
EXECUTIVE COMPENSATION I.R.C. § 280G Golden Parachute Payments to Disqualified Individuals
Not "Disqualified Individual" if:
Immediately before the change in control, no stock in such corporation was readily tradable on an established securities market, and
The payment was approved by a vote of persons who owned more than 75% of voting power of all outstanding stock

14. EXECUTIVE COMPENSATION I. R. C
EXECUTIVE COMPENSATION I.R.C. § 409A Non-Qualified Deferred Compensation Plans

15. EXECUTIVE COMPENSATION I. R. C
EXECUTIVE COMPENSATION I.R.C. § 409A Non-Qualified Deferred Compensation Plans - Election Rules
The election to defer compensation must be made by the last day of the tax year preceding the year in which services are performed, with the following exceptions:
In an employee’s first year of plan eligibility, the election may be made as late as 30 days after the date the employee becomes eligible.
For performance-based compensation, the election may be made as late as six months before the end of the performance period, but only if the performance period is at least 12 months in length.

16. EXECUTIVE COMPENSATION I. R. C
EXECUTIVE COMPENSATION I.R.C. § 409A Non-Qualified Deferred Compensation Plans - Distribution Rules
Distributions may not occur earlier than:
Separation from service
Disability
Death
A specified date or schedule of dates
Change in ownership or effective control of employer, or in ownership of a substantial portion of employer’s assets
Unforeseeable emergency

17. EXECUTIVE COMPENSATION I. R. C
EXECUTIVE COMPENSATION I.R.C. § 409A Non-Qualified Deferred Compensation Plans - Funding Rules
Offshore trusts or other arrangements are not permitted.
Funding that is triggered by a change in the employer’s financial health is not permitted.
Any funds set aside must remain available to creditors

18. EXECUTIVE COMPENSATION I. R. C
EXECUTIVE COMPENSATION I.R.C. § 409A Non-Qualified Deferred Compensation Plans – FICA Tax Rules