New 21 % Excise Tax on Nonprofit Executives: Does It Impact My Corporate Foundation?
As companies file their 2018 taxes, several corporate philanthropic leaders have contacted the Council with concerns surrounding the new excise tax. As part of the Tax Cuts and Jobs Act of 2017, Section 4960 of the bill imposes a 21 percent excise tax on highly-paid executives of nonprofit organizations.
Recent articles have left many in the corporate sector wondering whether this new tax on excessive remuneration of nonprofit executives applies to them (particularly if they serve on the board of a corporate foundation).
On May 13, the Council hosted a teleconference with The Conference Board and KPMG to explore concerns regarding the tax bill’s impact on corporate foundations. We’ve drafted a legal memo detailing specifics of Section 4960, which outlines how corporate foundations can determine the applicability of this tax to their unique situation. First, they must determine the “related status” of their corporate foundation and then confirm whether an individual is a “covered employee.”
Defining both of these situations is important because Section 4960 of the Tax Cuts and Jobs Act imposed a 21 percent tax for nonprofit organizations paying a single employee more than $1 million in a taxable year.
Key provisions: Section 4960 of the Internal Revenue Code imposes a tax equal to 21% on excess remuneration paid by an applicable tax-exempt organization (ATEO) to a covered employee in any taxable year. Excess remuneration is considered anything over $1,000,000. Remuneration can also include amounts paid by a related organization. Additionally, the tax will be imposed on any excess parachute payment by an organization to any covered employee. If liable for the tax, the ATEO employer, not the employee, is responsible for the tax.
Within this section of the Bill, use of language around “covered employee” and “related organization” have been subject to interpretation. For corporate foundations, this has included specific concerns in determining whether an individual is a covered employee. This thereby determines whether a company is hit with the 21 percent excise tax. For example, are corporate employees who also serve as Directors for a corporate foundation “covered employees?”
Variations in facts about specific corporations can lead to different determinations regarding whether an individual is a covered employee. Our analysis suggests that when a corporate employee serves solely as a volunteer director of a related corporate foundation, that person would not be a covered employee for the purpose of the tax.
From our conversations with the field and outreach directly to the Internal Revenue Service (IRS), a few additional items are clear:
- More clarity is needed on Section 4960.
- Several issues impacting corporate foundations were not considered when the Notice 2019-09 was drafted.
- The IRS has expressed interest in receiving comments on Notice 2019-09.
Given the interest of the IRS to learn more, the Council will be collecting input from the field to send formal comments about the impact of this section on corporate philanthropy. If you have questions or concerns, please email Lindsay.Mason@COF.org by May 31, 2019. Also, please feel free to share the legal memo with your corporate counsel.