The Tax Cuts and Job Act of 2017, which was enacted on December 22, 2017 (the “Act”), contains several provisions that impact tax-exempt organizations (“EOs”). Some of these provisions impose new or additional taxes that may adversely affect an EO’s ability to accomplish its exempt purposes. The following is a brief summary of certain significant provisions of the Act that affect EOs.
New Excise Tax for Certain Executive Compensation Payments
Effective for tax years beginning after December 31, 2017, the Act adds a new section 4960 to the Internal Revenue Code (the “Code”), under which EO employers will be subject to a 21% tax (the new corporate tax rate under the Act) on (i) compensation in excess of $1 million (excluding any “excess parachute payment”) or (ii) any “excess parachute payment” paid to a “covered employee.” For this purpose, the “covered employees” of an EO include its five highest-paid employees for the tax year and any other individuals who were “covered employees” for any tax year after 2016. Generally, an “excess parachute payment” is a payment made in connection with an employee’s termination of employment that exceeds three times the employee’s average annual compensation for the five tax years preceding such termination.