Since the Tax Cuts and Jobs Act of 2017, many nonprofit organizations have experienced a significant tax on the compensation of certain employees and any separation payments (aka parachute payments) paid to highly compensated employees. This is under the Internal Revenue Code (IRC) Section 4960. We believe nonprofit entities can take several actions to mitigate excise taxes related to IRC Section 4960, and Miser Wealth Partners is here to help you explore all of them.
What is the excise tax through IRC Section 4960?
The IRC Section 4960 imposes an excise tax (currently 21%) on applicable tax-exempt nonprofit organizations that pay covered employee wages in excess of $1 million and on parachute payments. It’s important to understand the significance of this tax and how it impacts your organization.
What organizations are affected by excise tax?
The excise tax applies to applicable tax-exempt organizations (ATEOs) and related entities as defined by the IRS, which includes all nonprofits and many other governmental units. Even some for-profit employers related to ATEOs could owe excise tax. For example, for-profit companies within a tax-exempt nonprofit controlled group could be affected.
How can I mitigate excise tax for my nonprofit?
The financial advisors at Miser Wealth Partners are skilled at helping a variety of nonprofit organizations mitigate the excise tax, and we’re ready to help you too. Some of the effective strategies we use include the following:
- Review executive compensation: IRC Section 4960 imposes an excise tax on excessive executive compensation paid by nonprofit entities. To mitigate this tax, nonprofits can review and potentially adjust executive compensation packages to ensure they are reasonable and not considered excessive. This can involve benchmarking executive compensation against comparable organizations and considering factors such as the size of the organization, the executive’s role, and market rates.
- Implement compensation strategies: Nonprofit entities can explore compensation strategies that align with the requirements of IRC Section 4960. For example, they can consider structuring compensation packages to include more modest base salaries with performance-based incentives tied to achieving specific goals and outcomes. This approach can help ensure that compensation is directly linked to organizational performance and mission impact.
- Consider splitting roles: Nonprofit entities can consider splitting executive roles to separate compensation arrangements. By assigning different individuals to oversee specific areas of responsibility, such as program management and fundraising, it may be possible to ensure that no single individual’s compensation triggers the excise tax threshold.
- Diversify revenue streams: Nonprofits heavily reliant on revenue sources that may trigger the excise tax, such as government grants or contracts, can explore diversifying their revenue streams. By expanding fundraising efforts, pursuing partnerships, or exploring alternative revenue models, non-profits can reduce their reliance on potentially taxable revenue sources.
- Monitor and track compensation: Nonprofit entities should establish robust systems and processes for monitoring and tracking executive compensation. Accurate recordkeeping is crucial for demonstrating compliance with the requirements of IRC Section 4960. By maintaining detailed records and documentation related to compensation decisions, nonprofits can effectively respond to any inquiries or audits by tax authorities.
Why choose Miser Wealth Partners to help your nonprofit mitigate excise tax?
Given the complexity of tax regulations and the potential implications of IRC Section 4960, nonprofits should seriously consider consulting with experienced tax advisors and legal professionals who specialize in this form of tax compliance. Miser Wealth Partners can provide guidance on structuring compensation, interpreting and applying the regulations, and ensuring compliance with all relevant tax laws. We’ll keep you up to date of any changes to tax laws and regulations as well as any additional information provided by the IRS.
What’s my next step to excise tax mitigation in East Tennessee?
Your knowledgeable team at Miser Wealth Partners is standing by ready to help you take proactive measures to mitigate excise taxes. Reach out to us today