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IRS offers guidance on excise taxes for nonprofit executive comp

The Internal Revenue Service issued a notice Monday providing interim guidance on a provision of the Tax Cuts and Jobs Act that imposes an excise tax on excess payments and remuneration of top officials at tax-exempt organizations.

IRS headquarters
The Internal Revenue Service building in Washington, D.C.

Section 4960 of the Tax Cuts and Jobs Act taxes some nonprofits on the compensation they pay to their “covered employees” over $1 million per year and on certain excess parachute payments paid to their covered employees contingent upon a separation from employment. The new taxes are for taxable years starting after Dec. 31, 2017. The tax-exempt organization is responsible for paying the excise tax instead of the employee.

The IRS released Notice 2009-09 on Monday despite the partial government shutdown, which affects the Treasury Department, because the IRS is allowed to make an exception for work related to the Tax Cuts and Jobs Act. The new notice provides interim guidance on the provisions of the new Section 4960 added by the Tax Cuts and Jobs Act, and announces the intention of the Treasury and the IRS to issue proposed regulations. Section 4960 provides that excess remuneration and excess parachute payments paid by an applicable tax-exempt organization to a covered employee are subject to an excise tax (currently 21 percent).

The notice provides interim guidance defining the meanings of the terms “applicable tax-exempt organization,” “excess remuneration,” “covered employee,” and “excess parachute payment.” In addition, the notice explains to taxpayers how to report and pay the excise tax.

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