Effective for taxable years beginning after December 31, 2017, section 4960 of the Internal Revenue Code imposes a tax at the corporate income tax rate (currently 21 percent) on two types of compensation paid by applicable tax-exempt organizations (ATEOs) to their covered employees. An ATEO’s covered employees generally include its five highest paid
New § 4960 of the Internal Revenue Code Imposes an Excise Tax on Compensation Paid to the Top Five Employees of Tax-Exempt Organizations
As part of the Tax Cuts and Jobs Act of 2017, Congress enacted new § 4960 of the Internal Revenue Code. Section 4960 imposes an excise tax on certain executive compensation paid by tax-exempt organizations – similar to the $1 million limit on deductions for compensation paid to highly paid executives in for-profit companies under § 162(m) of the Code and to the golden parachute rules of § 280G of the Code. The new provision could have a significant impact on some tax-exempt organizations, but it lacks important detail and leaves many questions unanswered. The excise tax provision is in addition to other rules applicable to reasonable compensation paid to employees of tax-exempt organizations.
The statute directs the Secretary of the Treasury to prescribe regulations under § 4960 “as may be necessary to prevent avoidance of the tax under this section, including regulations to prevent avoidance of such tax through the performance of services other than as an employee or by providing compensation through a pass-through or other entity to avoid such tax.” No regulations or other IRS guidance have been issued under § 4960 thus far.
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