AICPA recommends further guidance on compensation for nonprofit execs

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The American Institute of CPAs has asked the Internal Revenue Service for more guidance on a provision of the Tax Cuts and Jobs Act that imposes a 21 percent excise tax on tax-exempt organizations that pay over $1 million in compensation, or so-called “excess parachute payments,” to top executives.

The 2017 tax law added Section 4960 to the Tax Code, which provides for a 21 percent excise tax on any remuneration paid (other than an excess parachute payment) by an applicable tax-exempt organization (ATEO) for a taxable year with respect to employment of any covered employee in excess of $1 million; plus any excess parachute payment paid by such organization to any covered employee, the AICPA noted in the comment letter it sent Wednesday to the IRS. A “covered employee” is one of the top five highest-compensated employees.

Section 4960 aims to put tax-exempt organizations on an equal tax footing with taxable organizations that are subject to the section 162(m) $1 million limit on deductible compensation and the excise tax on excess parachute payments under section 280G.

Last year, the IRS issued interim guidance in Notice 2019-19 on the excise tax, the rules involving entities liable for the excise tax under section 4960, how the excise tax is calculated, and how taxpayers should report and pay the tax, and the AICPA submitted its recommendations in Wednesday’s comment letter.

The AICPA recommended the Treasury and the IRS provide guidance on a number of issues, including allocation of remuneration and the excise tax, equity compensation, duplication of the excise tax and a disallowed deduction under section 162(m), the short-term deferral exception, application of the limited services exception, the cut-off date on covered employee status, death benefits, along with matters involving vacation pay, sick pay, disability pay, paid time off and payroll practices.

On that point, the AICPA recommended that the IRS and Treasury issue proposed regulations applying traditional payroll practices to determine the amount of remuneration subject to section 4960 for end-of-the-year payroll, accrued sick pay, accrued vacation pay, and accrued paid time off and disability pay. The Institute also recommended inclusion of amounts in section 4960 remuneration only when they’re paid (using the cash basis method of accounting for the compensation) instead of when it becomes vested under section 457(f).

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