Internal Revenue Code section 162

It trains you to treat the tax code like a private club.

It trains you to assume that there's an executive bonus arrangement under the IRS section 162A, for example, just to pick that one out of a hat here.

It's a tool that sits in the same public code as the 401k does.

But you begin to think of 162A plans and similar strategies as some sort of backroom trick instead of a paragraph that anybody can read.

I just don't want to accept that.

So we're going to walk through some of the playbook itself.

Section 162A, to be precise, of the tax code, something that all of us can look up on the Internet this afternoon or go check it out at the library if you want to.

Most people never hear about it.

We're talking about the taxation of influencers and content creators.

So what is deductible? It all comes down to what is an ordinary and necessary business expense under Section 162, really.

There's two components.

I'm going to talk about it, but I discussed it in a lot more detail in Episodes 4 and 5.

An option dated to a day when the stock closed at $30 approved on a day when it traded at $50 carries $20 per share of built-in value that the company never recorded as compensation.

Concealing that value understated expense under Accounting Principles Board Opinion No. 25 supported a tax deduction that Section 162(m) of the Internal Revenue Code did not allow and contradicted the proxy statements that told shareholders every exercise price equaled market value on the grant date.

By January 2008, roughly two hundred companies had faced federal investigation or restated earnings.

William McGuire, the former chief executive of UnitedHealth Group, settled with the SEC on December 6th, 2007, for $468 million, the largest backdating settlement.

Companies with misstated grants restated prior periods.

By October 2006, fifty-four companies faced potential NASDAQ delisting for late financial filings, and in January 2007, the SEC Division of Corporation Finance issued a sample comment letter on restated financial statements involving option grant errors.

What tax rules did backdated options violate? Backdated options with an exercise price below fair market value on the grant date failed three Internal Revenue Code requirements: the performance-based exception in Section 162, the exercise price test for incentive stock options in Section 422b4, and the discounted option rules of Section 409A.

Section 162 enacted in the Omnibus Budget Reconciliation Act of 1993 caps the corporate deduction for covered executive pay at $1 million per year and exempts performance-based pay.