1125-E Instructions for Form 1125-E

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Instructions
for Form 1125-E

Department of the Treasury
Internal Revenue Service

(Rev. October 2018)

(Use with the October 2016 revision of Form 1125-E.)

DRAFT AS OF
September 26, 2018
Compensation of Officers

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

Section references are to the Internal Revenue Code
unless otherwise noted.

Future Developments

For the latest information about developments related to
Form 1125-E and its instructions, such as legislation
enacted after they were published, visit IRS.gov/
Form1125E.

General Instructions
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, 1120-REIT, or 1120S, 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 1a, plus lines 4 through 10.
• Form 1120-C, page 1, line 1a, plus lines 4 through 9.
• Form 1120-F, 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.
• Form 1120S, page 1, line 1a, plus lines 4 and 5; income
reported on Schedule K, lines 3a, 4, 5a, and 6; income or
net gain reported on Schedule K, lines 7, 8a, 9, and 10;
and income or net gain reported on Form 8825, lines 2,
19, and 20a.
For more information on total receipts, see the
instructions for the applicable entity’s return.

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.

Sep 26, 2018

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 or principle financial
officer of the corporation (or an individual acting in that
capacity) at any time during the tax year;
• 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 or principal financial officer,
or an individual acting in that capacity); or
• A covered employee of the corporation (or any
predecessor) for any preceding tax year beginning after
December 31, 2016.

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 following also apply.

• The deduction limit does not apply to 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.
Special rules apply to binding written contracts in effect
on November 17, 2017, and which were not materially
modified on or after that date. See section 162(m), as
modified by P.L. 115-97.
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, any excess parachute payments made to a
covered executive by an applicable employer participating
in a Treasury TARP are not deductible as compensation if

Cat. No. 57670C

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.

If the corporation claims a credit for any wages paid or
incurred, it may need to reduce its deduction for officers’
compensation. See section 280C. If the corporation
provided taxable fringe benefits to its officers, such as
personal use of a car, do not deduct as wages the amount
allocated for depreciation and other expenses claimed
elsewhere on the return.

Specific Instructions

Enter the amount from line 4 on Form 1120, page 1,
line 12, or the appropriate line of the applicable return.
See the instructions for the applicable entity's return.

Line 4

DRAFT AS OF
September 26, 2018
Line 1

Complete columns (a) through (f) for all officers. A
corporation determines who is an officer under the laws of
the state/country where it is incorporated.
If a consolidated return is filed, this information must be
furnished for each officer of the affiliated group. However,
the common parent of a consolidated group may file, as
part of its consolidated return, one Form 1125-E on behalf
of the members of the affiliated group.

Paperwork Reduction Act Notice. We ask for the
information on this form to carry out the Internal Revenue
laws of the United States. You are required to give us the
information. We need it to ensure that you are complying
with these laws and to allow us to figure and collect the
right amount of tax.

You are not required to provide the information
requested on a form that is subject to the Paperwork
Reduction Act unless the form displays a valid OMB
control number. Books or records relating to a form or its
instructions must be retained as long as their contents
may become material in the administration of any Internal
Revenue law. Generally, tax returns and return
information are confidential, as required by section 6103.

Column (b). Enter each officer's social security number
(SSN) in column (b). Filers may elect to provide only the
last four digits of the officer's SSN.
Column (f). Enter each officer's total deductible
compensation (such as salaries, commissions, bonuses,
taxable fringe benefits, etc.). For officers of an S
corporation, include fringe benefits and expenditures
made on behalf of officers owning more than 2% of the
corporation's stock. Do not include amounts paid or
incurred for fringe benefits of officers owning 2% or less of
an S corporation's stock. These amounts are reported
elsewhere on the corporation's return. See the
Instructions for Form 1120S for more information on
deductible officers’ compensation.

The time needed to complete and file this form will vary
depending on individual circumstances. The estimated
burden for business taxpayers filing this form is approved
under OMB control number 1545-0123 and is included in
the estimates shown in the instructions for their business
income tax return.
If you have comments concerning the accuracy of
these time estimates or suggestions for making this form
simpler, we would be happy to hear from you. See the
instructions for the tax return with which this form is filed.

Line 3

Enter compensation of officers deductible elsewhere on
the return, such as amounts included in cost of goods
sold, elective contributions to a section 401(k) cash or
deferred arrangement, or amounts contributed under a
salary reduction SEP agreement or a SIMPLE IRA plan.

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