The Tax Cuts and Jobs Act created a new concept for tax-exempt organizations – an excise tax on excess executive compensation. New Internal Revenue Code Section 4960 became effective January 1, 2018; and actually creates two separate taxes. First, there is a tax of 21% on remuneration over $1,000,000 paid in a taxable year to a covered employee. Second, there is a tax of 21% on any excess parachute payment paid to a covered employee. These taxes are payable by the tax-exempt entity employer, or in some cases its related entity.
As with much of the Tax Cuts and Jobs Act, the drafting of the statute is somewhat imprecise, so regulations will be important. Having said that, however, the intent is clear.
Who is subject to this tax?
Any organization exempt under Section 501(a), including all 501(c) organizations (4960 applies to 501(c)(3) entities, as well as social welfare organizations, trade associations, Veterans groups, etc.); certain 501(d) religious organizations; certain trusts under section 401(a); farmers’ cooperative organizations exempt under Section 521(b)(1); entities exempt under section 115(1); and political organizations described in section 527(e)(1).
Who is a covered employee?
An employee who is one of the five highest compensated employees for the taxable year, or was in the top five for any tax year beginning after December 31, 2016. Once a person is a “covered employee” they remain so for all future years.
What’s included in remuneration?
Generally, W-2 income, but also “amounts required to be included in income under section 457(f).” Not included in remuneration is compensation paid to a licensed medical professional for the performance of medical or veterinary services.
What is an excess parachute payment?
Think severance pay. The “excess” is the amount that exceeds three times the “base amount” which is essentially the employee’s average annual compensation for the most recent five taxable years.
Timetable for regulatory guidance?