Section 162(m) $1 Million Compensation Deduction Limit Calculator 2026
Calculate the Section 162(m) deduction disallowance for covered employees at public companies. Find lost deductions, tax cost, and after-tax compensation expense.
Covered Employee Compensation
Enter total annual compensation (cash + vested equity + other) for each covered employee. The $1M cap is applied per employee per year.
%
21% for most C-corps; higher for state tax included $0
Total Extra Tax Cost (162m)
$0
Total Lost Deduction
$0
Total Covered Compensation
$0
Deductible Compensation
Deduction Analysis by Covered Employee
| Employee | Total Comp | Deductible Cap | Lost Deduction | Extra Tax Cost (21%) |
|---|
How Section 162(m) Works
Section 162(m) limits the deductibility of compensation paid to covered employees of publicly held corporations. Unlike most tax rules, the disallowance is permanent β excess compensation can never be deducted. The company pays full compensation to the executive but gets no tax benefit on amounts over $1 million.
The Formula
Deductible Compensation = min(Total Comp, $1,000,000) per covered employee
Non-Deductible Compensation = max(Total Comp β $1,000,000, 0)
Additional Tax Cost = Non-Deductible Compensation Γ Corporate Tax Rate
Total Annual 162(m) Tax Cost = Sum of additional tax costs across all covered employees
Non-Deductible Compensation = max(Total Comp β $1,000,000, 0)
Additional Tax Cost = Non-Deductible Compensation Γ Corporate Tax Rate
Total Annual 162(m) Tax Cost = Sum of additional tax costs across all covered employees
Example
CEO paid $4.5M total comp, 21% corporate tax rate:
Deductible: $1,000,000
Non-deductible: $3,500,000
Extra tax cost: $3,500,000 Γ 21% = $735,000 in additional taxes vs. fully deductible pay
Deductible: $1,000,000
Non-deductible: $3,500,000
Extra tax cost: $3,500,000 Γ 21% = $735,000 in additional taxes vs. fully deductible pay
Sources and References (click to expand)
- IRC Section 162(m) β Compensation in Excess of $1,000,000
- Treasury Regulation 1.162-27 β Employee Remuneration in Excess of $1 Million
- American Rescue Plan Act of 2021 (ARPA) β Section 9708, Expanding 162(m) Coverage
- Tax Cuts and Jobs Act of 2017 (TCJA) β Elimination of Performance-Based Exception
- IRS Notice 2018-68 β Guidance on Section 162(m) as Amended by TCJA
Extended
Compensation Structuring & After-Tax Cost Comparison
Compare current pay structure vs alternatives β deferred comp, equity grants, stock options; SVG after-tax cost chart
Compare the after-tax cost of different compensation structures. See how deferral, equity, and options affect the company's net cost under Section 162(m).
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Total intended compensation package %
Portion deferred to non-qualified deferred comp plan %
Options may spread income over vesting years %
After-Tax Compensation Cost by Structure
| Structure | Current Year Deductible | Non-Deductible | Extra Tax Cost | Net Company Cost |
|---|
Frequently Asked Questions
What is the Section 162(m) $1 million deduction limit?
Section 162(m) prohibits publicly held corporations from deducting more than $1 million per year in compensation paid to each "covered employee." Any compensation above $1 million per covered employee is permanently non-deductible β it cannot be carried forward or backward. The deduction disallowance increases the effective cost of high executive pay.
Who are covered employees under Section 162(m) after ARPA 2021?
The American Rescue Plan Act of 2021 expanded the covered employee group starting in 2027 to include the five highest-compensated employees (beyond the prior CEO, CFO, and three most highly compensated). The TCJA had already eliminated the performance-based compensation exception that previously allowed unlimited deductions for qualifying pay. Today any comp over $1M is non-deductible.
Does the "once covered, always covered" rule apply to Section 162(m)?
Yes. Once an individual becomes a covered employee for any taxable year beginning after December 31, 2016, they remain a covered employee for all future taxable years β even after termination. This means deferred compensation paid to a former executive years later may still be subject to the $1 million deduction cap.
Can performance-based compensation avoid the Section 162(m) limit?
No. The Tax Cuts and Jobs Act of 2017 eliminated the performance-based compensation exception prospectively. Previously, compensation that met certain requirements (shareholder-approved formula, independent committee oversight) was fully deductible regardless of amount. Transitional relief under Notice 2018-68 preserved the exception for some contracts entered into before November 2, 2017.
What is the tax cost of the Section 162(m) deduction disallowance?
The tax cost equals the non-deductible compensation multiplied by the corporate tax rate. For example, $500,000 of non-deductible compensation at a 21% rate costs the company $105,000 in additional taxes compared to if the compensation were deductible. Companies must weigh this cost against the retention and performance benefits of higher executive pay.