Executive Compensation Excise Tax: What You Need to Know Now

The IRS and Treasury Department have released interim guidance on the new tax law affecting excise taxes on executive compensation for tax-exempt organizations such as nonprofits and higher education entities.

Notice 2019-09 temporarily addresses specifics about the executive compensation excise tax until permanent guidance can be issued.

What is the executive compensation excise tax?

The Tax Cuts and Jobs Act (TCJA) included a requirement that an applicable tax-exempt organization (ATEO) must pay a 21% excise tax on employee compensation of over $ 1 million (effective for its five most highly paid employees). It also targeted excess parachute payments made to these employees who had departed their jobs.

However, the language left confusion as to the definition of such an organization. Specifically, public colleges and universities could easily infer that language exempting governmental entities from this new law applies to them. There was also confusion regarding how to determine the taxable year in which to calculate the excise tax.

What was addressed?

Notice 2019-19 indicates that certain state colleges and universities may not be considered ATEOs and are therefore not subject to the excise tax. This is in contrast to the legislative history which was intended to cover highly paid employees at public universities. It remains unclear whether this will be addressed when the guidance is finalized, and NACUBO has not yet weighed in on this issue either.

It also defines the taxable year as the calendar year ending with or within the tax year (such as a fiscal year) of the organization. For example:

  • A nonprofit has a fiscal year from July 1, 2018, to June 30, 2019.
  • Any qualifying executive compensation during the 2018 calendar year would be subject to the excise tax, since that year ends within the nonprofit’s fiscal year.

This measurement period aligns more closely with the reporting on a nonprofit’s Form W-2 and Form 990—which means the wage calculations only have to be done once.

Key terms and applications are also defined and illustrated by examples. The notice consists of 92 pages, and we recommend that you take a look at the details within for further information.

What do I need to do?

The IRS is still hammering out the details for the final law. The agency is taking questions from the regulated community until April 2, after which it will perform further analysis and ultimately release final regulations. As further analysis of the notice is completed, we will continue to release more information.

Until that happens, we recommend that you follow a reasonable interpretation of the temporary guidance regarding the executive compensation excise tax. And if you have questions, don’t leave anything in doubt; contact your nonprofit tax CPA to make sure you’re as compliant as possible.

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