At a time when funders and nonprofits may need expertise and unique insights to navigate the complex issues of our sector, a new 21 percent excise tax may affect their ability to retain and recruit high caliber talent to make such high stakes decisions.

The U.S. Department of the Treasury and the Internal Revenue Service are finalizing guidance for Notice 2019-09, which applies a 21 percent tax when an employee is earning in excess of $1 million and is “one of the tax-exempt organization’s five highest-compensated employees, including pay from related organizations.”

The tax is a component of the 2017 Tax Cuts and Jobs Act (TCJA). If liable for the tax, the tax-exempt organization, not the employee, is responsible for the tax.

The tax is applied even when an employee meeting that $1 million threshold is providing only limited service, or even volunteer service, to a tax-exempt organization.

For example, if a foundation wants to tap into the expertise of a corporate executive whose compensation is above the $1 million mark to examine issues at the foundation, the foundation could potentially be subject to this tax even if that individual is not on the foundation’s payroll. 

To provide education around the impact of this tax on the sector, CMF has submitted comments to the department and the IRS.

CMF submitted this document earlier this month since all comments to the federal government around components of the 2017 Tax Cuts and Jobs Act must be submitted by June 22 for any remedies on guidance or rulemaking to be retroactive.

In CMF’s comments to the federal government, we shared an example of what this could look like for an organization.

“The chief financial officer (CFO) of a related organization also serves as a volunteer officer of the foundation of the related organization. The CFO does this in order to lend their expertise to the management of the foundation’s assets.” Even though the CFO is serving in a volunteer capacity, the tax-exempt organization could find itself paying the excise tax.

CMF shared that since the tax-exempt organization could be subject to the tax it “could result in the loss of talent and expertise provided to a tax-exempt organization by skilled employees of a related organization.”

CMF’s legal counsel, Clark Hill, PLC, has drafted a memo with more detail about the mechanics of this new tax and who it affects. 

Before the department and IRS finalize the guidance, CMF is asking that the agencies consider providing clarity on when and to what extent the compensation paid to an employee of a related organization is subject to the tax.

CMF has also provided suggested regulatory language on several key points of this issue through our legal counsel Clark Hill, PLC.

Want more?

Our national partner, the Council on Foundations, issued a blog post from Lindsay Mason, director of corporate philanthropy, COF, digging into the impact of this tax on corporate foundations in particular. COF additionally released a legal memo summarizing the key issues.