IRS Proposes Regulations to Clarify Taxation of Performance-Based Equity Compensation
Executive Director
On June 24, the IRS issued what it termed a clarification of the rules regarding performance-based equity compensation. Generally, stock options and stock appreciation rights (SARs) granted by public companies to certain highly compensated employees and meeting specific conditions are not subject to the tax deduction limit of $1 million per year. One of those conditions is that the number of shares is specified, and the proposed regulations clarify that the number of shares must be specific for a given time period for each employee, rather than over the life of the plan or an aggregate amount for all participating employees. The proposed regulation also states that these maximums can be specified in the plan rather than in the individual award documents. In its review of the proposed changes, the law firm Morgan Lewis suggests that the proposed regulation has the potential to retroactively disallow prior tax deductions.