Final TCJA compensation and benefits tax rules generally are effective

The 2017 tax reform (commonly referred to as the Tax Cuts and Jobs Act or the TCJA) significantly changed the tax treatment of various executive compensation and employee fringe benefits provided by employers, including:

Limiting or eliminating tax deductions on employer meals and entertainment expenses under IRC Section 274
Eliminating tax deductions on employer-provided qualified transportation fringe (QTF) and other commuting benefits under IRC Section 274
Significantly expanding the IRC Section 162(m) annual $1 million deduction limitation on the compensation of any covered employee of a publicly held corporation
Adding a new excise tax (IRC Section 4960) on tax-exempt organizations that provide executive compensation in excess of certain limits

Subscribe now

While these law changes generally are effective for tax years beginning after Dec. 31, 2017, taxpayers must apply reasonable, good faith interpretations of the statute along with any relevant guidance released by the U.S. Department of the Treasury (Treasury) and the IRS.

During 2018, Treasury and the IRS began to release such guidance on certain aspects of each of the law changes, first in the form of notices and then in four sets of proposed regulations. Each of the four sets of proposed regulations were finalized between October 2020 and January 2021 – meaning that implementation of the final regulations is imminent or already required.

Each set of final regulations outlines specific rules on its effective date, crystalizes how certain transition rules apply, and describes whether and how (until the final regulations become effective) taxpayers may rely on either the relevant notice or the proposed or final regulations. Following is a high-level summary to help navigate these various effective and transition/reliance dates.

IRC Section 274: Deductibility of employer costs for meals and entertainment
(TCJA change generally effective for tax years beginning after Dec. 31, 2017)

Final regulations

Transition/reliance until final regulations effective

Published Oct. 9, 2020.

Effective for tax years beginning on or after Oct. 9, 2020.

Notice 2018-76.
Proposed regulations published Feb. 26, 2020.

Until the applicability date of the final regulations, taxpayers may rely on Notice 2018-76 or the proposed regulations.

(Note that under the Consolidated Appropriations Act, 2021, the temporary 100% deduction for expenses paid or incurred during calendar years 2021 and 2022 for food or beverages provided by a restaurant is subject to meeting requirements, including applicable current law and rules.)

IRC Section 274: Deductibility of employer-provided qualified transportation fringe and other commuting benefits (TCJA change generally effective for tax years beginning after Dec. 31, 2017)
Final regulations	Transition/reliance until final regulations effective
Published Dec. 16, 2020. Effective for tax years beginning on or after Dec. 16, 2020. However, taxpayers may choose to apply the optional rule for federally declared disasters to identify a typical business day (to determine peak demand period in relation to parking expenses) to tax years ending after Dec. 31, 2019.	Notice 2018-99. Proposed regulations published June 23, 2020. For parking expenses, other QTF expenses, and transportation and commuting expenses, as applicable, paid or incurred in tax years beginning after Dec. 31, 2017, and before Dec. 16, 2020, taxpayers may continue to rely on Proposed Regulations Sections 1.274-13 through -14, or the guidance provided in Notice 2018-99.

IRC Section 162(m): Annual $1 million deduction limit for each covered employee of a publicly held corporation
(TCJA change generally effective for tax years beginning after Dec. 31, 2017)

Final regulations

Transition/reliance until final regulations effective

Published Dec. 30, 2020.

Generally effective for tax years beginning on or after Dec. 30, 2020, but can apply to a taxpayer’s tax years beginning after Dec. 31, 2017, and before Dec. 30, 2020, if applied in their entirety and in a consistent manner.

Definitions of covered employee, written binding contract, and material modification apply to tax years ending on or after Sept. 10, 2018, but certain aspects of the covered employee definition apply to tax years ending on or after Dec. 20, 2019, if the corporation’s fiscal and tax years do not end on the same date.

Predecessor corporation definitions apply to corporate transactions that occur on or after Dec. 30, 2020. For transactions that occurred before this date, taxpayers may apply the final regulations or a reasonable, good faith interpretation of the term predecessor. However, for certain corporate transactions that occurred on or between the dates of Dec. 21, 2019, and Dec. 29, 2020, target corporations cannot be excluded from the term predecessor.

The final regulations add relief for umbrella partnership C-corporation (Up-C) structures (relief from the requirement for a corporation to take into account its distributive share of a partnership’s deduction for compensation expenses paid to a covered employee when determining the amount of compensation subject to IRC Section 162(m)’s deduction disallowance) by applying these rules only to compensation paid after Dec. 18, 2020.

Notice 2018-68.
Proposed regulations published Dec. 20, 2019.

Taxpayers cannot rely on Notice 2018-68 for tax years ending on or after Dec. 20, 2019.

The following are unchanged in the final regulations:

Up-C structures are provided relief for compensation paid after Dec. 30, 2020, pursuant to a written binding contract in effect on Dec. 20, 2019, and not materially modified thereafter.
Initial public offerings (IPO) occurring after Dec. 20, 2019, are not eligible for the prior law IPO transition rule.

IRC Section 4960: Excise tax on tax-exempt excessive executive compensation
(TCJA change generally effective for tax years beginning after Dec. 31, 2017)

Final regulations

Transition/reliance until final regulations effective

Published Jan. 19, 2021.

Effective for tax years beginning after Dec. 31, 2021.

The final regulations indicate that the issue of coordination with IRC Section 162(m) is still under consideration. Until future guidance is issued on this topic, taxpayers may use a reasonable, good faith approach with respect to the coordination of IRC Sections 4960 and 162(m) in circumstances in which it is not known whether a deduction for the remuneration will be disallowed under IRC Section 162(m) by the due date (including any extension) of the relevant Form 4720, “Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code.”

For this purpose, a reasonable, good faith approach must have a reasonable basis for anticipating that the compensation that a particular employee will be paid in the future may be subject to the deduction limitations of IRC Section 162(m).

Notice 2019-09.
Proposed regulations published June 11, 2020.

Until the applicability date of the final regulations, taxpayers can do only one of the following:

Rely on Notice 2019-09 in its entirety.
Rely on the proposed regulations in their entirety.
For tax years beginning after Dec. 31, 2017, and on or before Dec. 31, 2021, apply the final regulations in their entirety and in a consistent manner.

Until the applicability date of the final regulations, positions also may be based on reasonable, good faith interpretations of the statute. However, Notice 2019-09 describes certain positions that Treasury and the IRS have concluded are not consistent with a reasonable, good faith interpretation of the statutory language, and the proposed and final regulations reflect this view.

Actions to take now

The final rules under the TCJA executive compensation and fringe benefit tax changes under IRC Sections 274 and 162(m) became effective generally in 2021 (Jan. 1, 2021, for calendar year taxpayers). The final rules under IRC Section 4960 are applicable for tax years beginning on or after Jan. 1, 2022, but strict rules apply on reliance prior to this effective date. For tax years not yet subject to the final rules, it’s important to understand which rules apply to, and how they affect, the tax return for any such tax year. Additionally, for a tax year already in full swing to which the final rules must apply, the taxpayer should carefully review the final regulations to ensure proper implementation now even if the related tax return is not yet due – including for purposes of its tax provision.

Final TCJA compensation and benefits tax rules generally are effective

Actions to take now

Related topics