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01 February 2019
One of the more controversial and complex provisions of the Tax Cuts and Jobs Act has been the 21 percent excise tax on certain nonprofit executive compensation. On December 31, 2018, the IRS issued interim guidance that addresses how this tax will apply in various situations that commonly arise for tax-exempt employers. Establishing internal systems to comply with this guidance will be challenging.
One of the more controversial and complex provisions of the Tax Cuts and Jobs Act has been the 21 percent excise tax on certain nonprofit executive compensation. Section 4960 of the Internal Revenue Code imposes this tax on remuneration over $1 million and excess parachute payments that are paid by tax-exempt employers with respect to covered employees for tax years beginning after December 31, 2017. Covered employees for this purpose includes an employee or former employee who is "one of the five highest compensated employees of the organization."
On December 31, 2018, the IRS issued interim guidance that addresses how this tax will apply in various situations that commonly arise for tax-exempt employers. Overall, the IRS has interpreted Section 4960 in a manner that is unfavorable to tax-exempt employers, particularly nonprofit health systems. Establishing internal systems to determine which employees are covered by this excise tax is likely to be challenging. Key highlights of Notice 2019-09 include:
The Notice raises many issues for tax-exempt employers. We are continuing to evaluate the Notice and will be sharing additional thoughts going forward to help general counsel and executive compensation committees evaluate the impact of this development.
For further information on this topic please contact Ralph DeJong, Andrew Liazos, Robert Louthian or Erika Mayshar at McDermott Will & Emery by telephone (+1 202 756 8000) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The McDermott Will & Emery website can be accessed at www.mwe.com.
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