Deferred compensation is exactly what it sounds like: compensation that is deferred until a later date. Why would someone defer their compensation, especially given the time value of money? Well, it turns out that the government offered many tax benefits for those who did defer their compensation. Consequently, executives sought to defer large amounts of compensation as a way to avoid paying taxes. Recently laws have reversed this trend, however, by placing a $1 million cap on all deductions.

Under the new laws, a corporation may deduct compensation expenses as an ordinary and necessary business expense for its employees. However, the otherwise acceptable deduction for compensation paid or accumulated to a covered employee of a public corporation is limited to no more than $1 million a year. A person is considered a covered employee if they are the CEO of a corporation (or the individual acting in such capacity) at the close of the taxable year; as well, the four highest compensated employees are also taken into account for the limitation's rules.  

The deduction limitation is applied even in the case of an emergency resulting from transfer of property in connection with the performance of services. The deduction limitation applies to all compensation for services, including cash and the cash value of all remuneration (including benefits) paid in medium other than cash. There are a few factors that are not included in the deduction limitation. Such factors not included are remuneration based on commission; remuneration payable solely on account of the attainment of one or more performance goals if certain outside director and shareholder requirements are met (performance-based compensation); payments to a tax-qualified retirement plan (including salary deduction contributions); and amounts that are excludable from the executive's gross income (such as health benefits and miscellaneous fringe benefits).