General Instructions

Table of Contents

Purpose of Form

Certain entities with total receipts of $500,000 or more use Form 1125-E to provide a detailed report of the deduction for compensation of officers.

Who Must File

Form 1125-E must be completed and attached to Form 1120, 1120-C, 1120-F, 1120-RIC, or 1120-REIT, if the entity has total receipts (defined below) of $500,000 or more, and deducts compensation for officers.

Definitions and Special Rules

Total Receipts

For purposes of Form 1125-E, total receipts are determined as follows:

  • Form 1120, page 1, line 1c, plus lines 4 through 10;

  • Form 1120-C, page 1, line 1a, plus lines 4 through 9;

  • Form 1120-F, page 3, Section II, line 1a, plus lines 4 through 10;

  • Form 1120-RIC, Part I, line 8, plus net capital gain from Part II, line 1, and Form 2438, line 9a;

  • Form 1120-REIT, Part I, line 8, plus net capital gain from Part III, line 10, and Form 2438, line 9a.

Golden Parachute Payments

A portion of the payments made by a corporation to key personnel that exceeds their usual compensation may not be deductible. This occurs when the corporation has an agreement (golden parachute) with these key employees to pay them these excess amounts if control of the corporation changes. See section 280G and Regulations section 1.280G-1.

Disallowance of Deduction for Employee Compensation in Excess of $1 Million

Publicly held corporations cannot deduct compensation to a “covered employee” to the extent that the compensation exceeds $1 million. Generally, a covered employee is:

  • The principal executive officer of the corporation (or an individual acting in that capacity) as of the end of the tax year or

  • An employee whose total compensation must be reported to shareholders under the Securities Exchange Act of 1934 because the employee is among the three highest compensated officers for that tax year (other than the principal executive officer).

For this purpose, compensation does not include the following.

  • Income from certain employee trusts, annuity plans, or pensions.

  • Any benefit paid to an employee that is excluded from the employee's income.

The deduction limit does not apply to:

  • Commissions based on individual performance,

  • Qualified performance-based compensation, and

  • Income payable under a written, binding contract in effect on February 17, 1993.

The $1 million limit is reduced by amounts disallowed as excess parachute payments under section 280G.

See section 162(m) and Regulations section 1.162-27. Also see Notice 2007-49, 2007-25 I.R.B. 1429.

Limitations on tax benefits for executive compensation under the Treasury Troubled Asset Relief Program (TARP).   The $1 million compensation limit is reduced to $500,000 for executive remuneration and deferred deduction executive remuneration paid to covered executives by any entity that receives or has received financial assistance under TARP. The limit applies for each period in which obligations arising from financial assistance under TARP remain outstanding. The $500,000 is reduced by any amounts disallowed as excess parachute payments. See section 162(m)(5) for definitions and other special rules. Also see Notice 2008-94, 2008-44 I.R.B. 1070, for additional guidance.

  In addition, a portion of any parachute payments made to a covered executive by an applicable employer participating in a Treasury troubled asset relief program is not deductible as compensation if the payments are made because of a severance from employment during an applicable tax year. For this purpose, a parachute payment is any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued. These limits do not apply to a payment already treated as a parachute payment. See section 280G(e) and Notice 2008-94.

Note.

For years beginning after December 31, 2012, a deduction limit may apply to certain deferred compensation attributable to services provided to certain health insurance providers in tax years beginning after December 31, 2009. See section 162(m)(6) and Notice 2011-2, 2011-2 I.R.B. 260.

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