The Advisors' Blog

This Troutman Pepper Locke alert describes some more compensation considerations from the One Big Beautiful Bill Act (OBBBA) — with a focus on changes to Sections 162(m) and 4960. The memo first level sets on the pre-OBBBA status of 162(m):

Section 162(m) limits the federal income tax deduction that a publicly held corporation may claim for compensation paid to any “covered employee” to $1 million per year. Covered employees include the principal executive officer, principal financial officer, and the three other highest compensated executive officers of the publicly held corporation. For years after 2026, covered employees also include the next five highest compensated employees, whether or not executive officers (the “five highest paid employees”). Anyone who was a covered employee for a year beginning after December 31, 2016, remains a covered employee for all future years, even after termination of employment (the “once covered, always covered” rule). However, the once covered, always covered rule does not apply to the five highest paid employees.

The section 162(m) limit applies to all compensation, including salary, bonuses, equity awards, and other taxable remuneration, regardless of whether the compensation is performance-based. IRS regulations require the deduction limit to apply to all compensation paid by the corporation and any members of its “affiliated group” as determined under section 1504 (excluding the provisions of section 1504(b)), and the disallowed deduction is prorated among payors.

It then continues with this discussion of OBBBA changes:

For tax years beginning after December 31, 2025, OBBBA requires the section 162(m) deduction limit to apply to a publicly held corporation and all members of that corporation’s “controlled group” under sections 414(b), (c), (m), and (o), instead of the “affiliated group” under section 1504 as currently required by the section 162(m) regulations. This change means that publicly held corporations must consider compensation paid to employees by all members of the controlled group, both for identifying the covered employees and for determining the amount of compensation received by those covered employees subject to the section 162(m) deduction limit.

While “controlled group” and “affiliated group” are both “used to aggregate related entities for various federal tax purposes,” they “have distinct definitions, requirements, and applications” with “controlled group” being the broader concept.

Practically, the memo says this change may especially hit “UPREIT” and “Up-C” business structures. That’s because the primary impact will be for public companies with partnerships or other noncorporate entities in their controlled group that were not in their affiliate group, and only to the extent those entities pay compensation to employees. Since Section 162(m) doesn’t “present any significant tax planning or mitigation opportunities,” the main task here is to look out for additional guidance and then make sure you identify the correct controlled group for the 2026 tax year.

– Meredith Ervine