06/12/2020

IRS Limits Scope of Nonprofit Executive Compensation Tax

Greater insights are needed following TCJA

The Internal Revenue Service (IRS) has issued proposed regulations on the 21 percent excise tax on nonprofit executive compensation over $1 million and excess parachute payments paid by tax-exempt organizations to top executives.

The excise tax was created as part of the Tax Cuts and Jobs Act (TCJA) enacted by Congress in 2017. The proposed regulations address concerns in the nonprofit community that individuals with limited involvement in an organization could end up triggering the tax, such as someone who works for a corporation but volunteers at a related charity. The proposed regulations create an exception to the definition of a covered employee for employees whose total hours of service for a tax-exempt organization amount to less than 10 percent of their total working hours. Another new exception applies for employees that receive no compensation from a tax-exempt organization and who work more than 50 percent of their total working hours for a for-profit corporation.

An IRS official told Bloomberg BNA this week that Congress had given the IRS some limited authority to offer exceptions in the regulations.

“We felt we had some room to deal with situations we don’t think were intended to be captured by this [tax], but wanted to be careful not to administer so much tax planning that it unwittingly opens up something that could get abusive or undermine the code,” said Janine Cook, deputy associate chief counsel at the IRS.

This article was provided to OSAE by the Power of A and ASAE's Inroads.