REITs Executive Compensation Guide

Section 162(m) Section 162(m) (“ Section 162(m) ”) of the Internal Revenue Code of 1986, as amended (the “ Code ”) generally precludes a publicly held corporation from taking a federal income tax deduction for annual compensation in excess of $1 million provided to certain of its executive officers. Before the Tax Cuts and Jobs Act of 2017 (the “ TCJA ”) was signed into law, compensation that qualified as “performance-based” under Section 162(m) was not subject to the tax deduction limitations in Section 162(m). Under the TCJA, this performance-based exception (other than with respect to compensation pursuant to a “grandfathered” arrangement — generally a written binding contract in effect on November 2, 2017, that is not renewed or modified) was repealed and, among other changes, the coverage of Section 162(m) was expanded significantly to include individuals who, at any time during the year, serve as the CEO or CFO, as well as the three highest paid employees other than the CEO and CFO, and to provide that any officer who was a “covered employee” of the taxpayer (or any predecessor) for any preceding taxable

year beginning after December 31, 2016, will remain a covered employee in all future tax years, even if the employee is terminated, resigns or retires. These changes generally apply to taxable years beginning after December 31, 2017, with limited exception for payments under a grandfathered arrangement. As a result of these changes, REITs that are subject to Section 162(m) may no longer be able to deduct performance-based compensation and other amounts that were previously exempt from Section 162(m). This could increase taxable income and corresponding amounts that are required to be distributed (and taxed as dividend income rather than return of capital) to comply with the REIT distribution requirements and to eliminate U.S. federal income tax liability at the REIT level.

PRACTICE POINT: If a written binding contract was “grandfathered” because it was in effect as of November 2, 2017, but it is subsequently renewed or materially modified, the contract generally would be treated as a new contract entered into on the effective date of the renewal or modification with payments under the contract subject to the rules of Section 162(m), as modified by the TCJA.

2023 Guide to REIT Executive Compensation | 34