Old Rule

Except for special rules that apply to public companies, the reasonable compensation of all employees is fully deductible as an ordinary and necessary business expense. Before this year the compensation deduction of a covered employee in a public company was generally capped at $1 million, except for commissions and performance compensation. A public company could deduct a covered employee’s commissions and performance-based compensation. To be deductible, performance-based compensation had to be attributable to a written, objective performance standard, established by the company’s independent compensation committee on or before the 90th day of the service period, and approved by a separate shareholder vote. The amount of the performance-based compensation had to be reduced to a formula, although the employer could retain the discretion to reduce or eliminate (but not increase) the compensation awarded. READ MORE