On December 22, 2018, the Tax Cuts and Jobs Act was signed into law, making numerous and significant changes to the Internal Revenue Code, many of which impact executive compensation and employee benefits.  Two changes that impact deductibility are of particular concern.

First, the Act broadens the reach of IRC Section 162(m), the section of the Code that that caps at $1 million per year the deductibility of compensation paid by publicly held companies to certain employees, by broadening the scope both of the employees and of the employers to whom the cap applies.  Simultaneously, the Act eliminates the commonly relied upon performance-based exceptions to the cap, encouraging employers and employees to consider whether and how to amend compensation practices and vehicles for highly compensated employees.  (In a related change, tax-exempt organizations will now pay an excise tax on compensation in excess of $1 million per year paid to their covered employees, as well as an excise tax on certain parachute payments.)

Second, the Act eliminates employer deductibility of a number of employee benefits, such as certain transportation benefits, entertainment expenses and club memberships, as well as the deduction for employer-provided meals as of 2026.

Third, on the heels of the #MeToo movement, a new IRC Section 162(q) provides that an employer may not deduct any settlement or other payment “related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement.”  Furthermore, attorney’s fees related to such settlement or payment are also not deductible – apparently by either party.  Unless and until revised or clarified, this limitation on deductibility of attorney’s fees may serve as an inducement to both parties to consider apportionment in settlement agreements of the amounts paid pursuant to specific claims, separating, for example, the amounts paid on account of pay disparity from those paid on account of sexual harassment.