Final rules on exempt organization excess remuneration

By Sally P. Schreiber, J.D.

Tax-exempt organizations received guidance from the IRS on Tuesday regarding the excise tax on compensation in excess of $1 million and certain parachute payments. The IRS issued the final regulations (T.D. 9938) under Sec. 4960, which was added to the Code by Section 13602 of the law known as the Tax Cuts and Jobs Act, P.L. 115-97. The rules finalize proposed regulations (REG-122345-18) issued in June 2020. Sec. 4960 is effective for tax years beginning after Dec. 31, 2017.

Sec. 4960(a) provides that an applicable tax-exempt organization (ATEO) that pays to a covered employee remuneration in excess of $1 million for a tax year or any excess parachute payment is subject to an excise tax on the amount of the excess remuneration plus excess parachute payments paid during that tax year at a rate equal to the rate of tax imposed on corporations under Sec. 11 (the corporate tax rate is currently 21%).

The final regulations retain the basic approach and structure of the proposed regulations, with certain revisions. They restate certain statutory definitions and define various terms set forth in Sec. 4960. They also provide rules for determining:

  1. The amount of remuneration paid for a tax year for purposes of identifying covered employees and calculating the excise tax;
  2. Whether excess remuneration has been paid and in what amount;
  3. Whether a parachute payment has been paid and in what amount;
  4. The allocation of liability for the excise tax among related organizations; and
  5. The date of applicability of the final regulations.

The definitions and rules in the regulations apply solely for purposes of Sec. 4960.

In response to a comment on the proposed regulations, the applicability date of the rules has been changed. The proposed regulations said that the final regulations would apply to tax years beginning after Dec. 31 of the calendar year in which they were adopted as final in the Federal Register. Instead they will apply to tax years beginning after Dec. 31, 2021 (with the first year they apply generally being the 2022 calendar year).

Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.

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