IRS Issues Interim Guidance on Nonprofit Excise Tax
Last month, the IRS issued interim guidance on the 21 percent excise tax on tax-exempt executive compensation exceeding $1 million. ASAE will continue to work to reduce the impact of the excise tax on associations.
Despite the partial government shutdown, the IRS on Dec. 31 issued interim guidance [PDF] on the 21 percent excise tax on tax-exempt executive compensation exceeding $1 million in any taxable year, enacted as part of the 2017 tax law.
ASAE has flagged the tax as concerning to the tax-exempt community, particularly because compensation subject to the new tax includes more than just base salary. It also includes the cash value of most benefits, including those that have vested but haven’t been received, retirement benefits, and certain retention payments contingent upon service. This means that many nonprofits could be affected, not just those with highly compensated CEOs.
ASAE is particularly concerned about the treatment of amounts payable under Section 457(f) deferred compensation plans in which benefits vest all at once after a period of years (i.e., a “cliff-vesting” provision).
ASAE submitted comments to the Treasury Department last month requesting that the administration establish a grandfather rule for tax-exempt entities that applies to amounts paid pursuant to a written binding contract that was in effect prior to November 3, 2017. This would mirror the grandfather clause included in the tax law for executive compensation contracts of publicly held corporations.
In its guidance, the IRS said there is “no indication in the legislative history” that Congress intended there to be a grandfather rule for tax-exempt organizations. The guidance does, however, confirm that Section 457(f) plan benefits that vested on or before December 31, 2017 (in other words, before the effective date of the Tax Cuts and Jobs Act and the excise tax) are exempt from the excise tax, even if the benefits are paid on or after January 1, 2018.
The interim guidance is the first step in the regulatory process, and Treasury is expected to issue additional guidance going forward. ASAE will continue to make the case to Treasury for an allocation of the amounts in a 457f plan to each year in the vesting period. ASAE will also continue to weigh in with House and Senate leadership and members of the tax-writing committees to advocate for a grandfather for the tax-exempt sector.
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