Tax insight

Tax Act modifies Section 162(m) aggregated group and deduction allocation rules

Insight
5 minute read
July 16, 2025

What happened?

The “One Big Beautiful Bill Act” (Act), signed into law on July 4, includes provisions amending Section 162(m). Section 162(m) limits the compensation deduction of a "publicly held corporation" to $1 million per "covered employee" in the tax year when the deduction otherwise would apply. Effective for tax years beginning after December 31, 2025, the Act expands how the deduction limitation applies to public corporations by adding a definition of the aggregated group that must include the publicly held corporation. The Act also imposes new rules on the allocation of the $1 million deduction limitation among members of that aggregated group.

Why is it relevant?

The Section 162(m) regulations have included specific aggregation rules since the enactment of Section 162(m). The regulations further addressed those aggregation rules (including rules on allocating the deduction limitation among members of the aggregated group) when Congress made amendments to Section 162(m) under the 2017 tax reform act (2017 Act) and most recently in proposed form related to amendments under the American Rescue Plan Act (ARPA). The ARPA amendments to Section 162(m) will apply to tax years beginning after December 31, 2026.

The Act’s amendments to Section 162(m) replace the current affiliated group and deduction limitation allocation rules under the regulations. Accordingly, a separate analysis under the Act applies to Section 162(m) determinations for the first tax year it is effective (i.e., the tax year beginning after December 31, 2025) versus tax years beginning after December 31, 2026, when amendments to Section 162(m) under the ARPA become effective.

Observation: The interaction between the Act’s amendments to Section 162(m) and the ARPA’s amendments to Section 162(m) raise new issues and questions. In January of this year, Treasury and the IRS released proposed regulations related to the ARPA changes to Section 162(m), which will need reconsideration in light of the Act’s changes.

Actions to consider

For tax years beginning after December 31, 2025, taxpayers should consider the impact of the Act on current Section 162(m) determinations. Additionally, the ARPA additions are on the horizon (for tax years beginning after December 31, 2026) and should be evaluated in connection with the Act’s changes to Section 162(m).

With the complexity of two new laws, each of which amends Section 162(m) and has a different effective date, along with proposed regulations that are likely to change, taxpayers should consider how each law applies to their specific structure and facts. Taxpayers also should monitor developments in guidance from Treasury and the IRS.