The IRS has provided detailed guidance (Notice 2019-09) on identifying and calculating the new excise taxes on tax-exempt organizations under Section 4960.
Section 4960 was created by the Tax Cuts and Jobs Act (TCJA) and imposes two 21% excise taxes on tax-exempt organizations on remuneration in excess of $1 million for the highest-paid employees (covered employees) and parachute payments (compensation contingent on separation from employment) equal to at least three times a covered employee’s average pay. The new taxes are effective for taxable years of tax-exempt organizations beginning after Dec. 31, 2017.
Although Notice 2019-09 does not provide any transition relief for tax-exempt organizations to adopt the new rules under Section 4960, the Notice does emphasize that the new excise taxes generally do not apply to remuneration and parachute payments that vested before the effective date.
Grant Thornton Insight: Tax-exempt organizations should review their existing compensation arrangements in light of the new guidance to identify opportunities to mitigate the potential impact of the new excise taxes on excess remuneration and parachute payments. Employers should also consider this interim guidance when entering into new compensation arrangements with executives or redesigning existing arrangements to reduce or eliminate exposure to the new excise taxes.
Managing Director, Washington National Tax Office
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