This article is another in City National’s ongoing summaries of the Tax Cuts and Jobs Act of 2017 (the “New Act”). The New Act significantly modifies the rules established under the Tax Reform Act of 1986 as amended (the “Old Code”).
In this article, we explain how the changes that are introduced under the New Act affect excise taxation on excess executive compensation within tax-exempt organizations.
Under the Old Code
Section 162(m) of the Old Code prohibited (1) publicly held corporations from (2) deducting more than $1,000,000 of compensation paid to (3) any “covered employee” (the CEO and the three next highest-level employees, other than the CFO, in place at the end of the tax year). However, if the compensation was (4) “qualified performance based compensation” or (5) paid on a commission basis, the corporation was permitted to deduct the compensation. There was no provision under the Old Code for “covered employees” or for excess compensation penalties as they related to tax-exempt organizations (e.g., charities).
Under the New Act
A charity (i.e., tax-exempt organization) must pay an excise tax equal to 21%1 on any salary greater than $1,000,000 paid to a “covered employee” for a taxable year and/or certain severance payments paid to a covered employee. A “covered employee” generally includes the five highest-compensated employees.
Charitable (i.e., tax-exempt) organizations will need to review their compensation plans to determine the impact of this new excise tax. If you have any questions about this article, or how City National can help you achieve your financial goals on your way up, please contact your City National Private Banker.
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