10 Keys to Excise Tax on Executive Compensation Paid by Tax-Exempt Organizations
In this article from The National Law Review, key issues are highlighted relating to the IRS recently Proposed Regulations under code Section 4960, enacted as part of the 2017 Tax Cuts and Jobs Act which imposes a 21% excise tax on compensation exceeding $1 million for employees in applicable tax-exempt organizations (ATEOs).
The Proposed Regulations provide further clarification in response to the interim guidance the IRS offered last year, urging tax-exempt entities to pay close attention to executive compensation allocation. The article does a great job of breaking down some of the complexities of Section 4960 and several key topics are explained; top issues include guidance on exactly what organizations are considered ATEOs and clear definition on who qualifies as a covered employee. It should be noted that tax penalties may be easily triggered by parachute payments, regardless if the individual reaches the $1 million in executive compensation.
While the IRS clarified many questions this remains a complex issue for tax-exempt entities. Until final regulations are confirmed, organizations can rely on a “good faith” interpretation of the statute and are encouraged to seek guidance related to executive compensation as addressed by the Proposed Regulations.