Executive compensation in the OBBBA: Three things taxpayers should know

The One Big Beautiful Bill Act (OBBBA) (P.L. 119-21) made noteworthy changes to executive compensation. Here are three planning considerations:

1. $1 million compensation deduction limit for publicly held corporations

The annual compensation deduction that a publicly held corporation is allowed for compensation paid to covered employees is limited to $1 million per covered employee. Prior to OBBBA, related companies were aggregated based on the companies allowed to file a consolidated income tax return. Beginning in 2026, the OBBBA significantly broadens the required aggregation by including all companies in the controlled group. It requires compensation paid by members of the controlled group to a covered employee to be aggregated to determine compensation in excess of the $1 million deduction limit. The deduction limit will be allocated to each member of the controlled group based on the amount each company paid the covered employee.

Planning consideration: The OBBBA revision is effective for tax years beginning in 2026. Public companies should determine companies within the controlled group, identify covered employees and track compensation paid by each company to determine the total compensation paid and the allocable portion of the $1 million limit.

2. Reminder: Covered employee group expands for the $1 million compensation deduction limit

Effective for tax years beginning after 2017, the Tax Cuts and Jobs Act (TCJA) modified the definition of covered employees for purposes of the $1 million deduction limit for publicly held companies to include the CEO, the CFO and the next three highest compensated officers. The TCJA also expanded covered employees to include anyone who was ever a covered employee, such as covered employees who terminated employment or retired. The American Rescue Plan Act (ARPA) further revised the definition of covered employees to include the next five highest paid employees, whether or not they are officers.

Planning consideration: The modification made by ARPA is effective for tax years beginning 2027. Public companies should review their systems to ensure accurate determination of the next five highest paid employees across all companies in the controlled group. Companies may also want to review or restructure compensation plans to defer compensation.

3. Excise tax on compensation over $1 million paid by tax-exempt organizations