The recently released IRS guidance on the excise taxes for nonprofit executives earning over $1 million still leaves many unanswered questions. The notice provides interim guidance on a provision of the Tax Cuts and Jobs Act that enforces an excise tax of 21% on excess payments and remuneration over $1 million for these executives as well as on certain excess parachute payments paid to them upon a separation from employment.

Many organizations are still questioning whether this excise tax actually applies to them.  Organizations that will most likely be affected are:

Non-profits and Government Organizations That Meet These Criteria:

  • Non-profits that have a tax exemption under section 501(c)
  • Government organizations that get an income tax exemption under section 115(1) will be on a case-by-case basis

Public Colleges and Universities

  • Public colleges and universities that are an arm of the state government and fall under section 501(c)3 exemptions would be subject to the excise tax.
  • Public universities that do not have an exemption under section 501(c)3 because they get their income tax exemption under section 115 are not impacted.
  • Public colleges and universities that pay seven figure salaries to football and basketball coaches will most likely have to pay the excise tax, but this is a case-by-case basis.

To try to minimize tax liability, organizations should take into account their wages that are subject to withholdings and their deferred compensation that is vested because this can drive them over the $1 million limit.

The IRS intends to issue additional guidance to clarify these rules but they have not announced a release date. If you have questions, contact an MCB Advisor at 703-218-3600 or click here. To review a summary of recent articles related to exempt organizations, click here. To learn more about MCB’s Not-for-profit  practice, click hereTo learn more about MCB’s tax practice and our tax experts, click here.

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