The Tax Cuts and Jobs Act of 2017 imposes excise taxes on tax-exempt organizations who pay compensation excess of $1 million or make certain “excess parachute” payments on account of termination of employment. The IRS has recently released draft 2018 Form 4720 (and instructions) which is filed with the organization’s Form 990 to report and pay any of these excise taxes under Code Section 4960.
What is Section 4960 Taxation?
In brief, starting with tax year 2018, most tax-exempt organizations are liable for a 21% excise tax on compensation paid to certain “covered employees” that exceeds $1 million. Likewise, the 21% excise tax applies to “excess parachute” payments to covered employees where the amount is the excess of the present value of payments contingent on termination of employment over the covered employee’s average compensation for the last 5 years multiplied by 3. Covered employees are any of the 5 highest paid employees for each year starting with 2017. For more detailed discussion of the Tax Cuts and Jobs Act, see our prior Comp and Benefits Brief.
New Form 990 Line 15
IRS Form 990 for 2018 includes a new line 15 which asks whether the organization is subject to Section 4960 taxation. If yes, Form 4720 is required.
What is Form 4720?
This form is not new; it has been used in prior years to report certain excise taxes. The draft for 2018 includes a new Schedule N to Form 4720 to report any excise tax under Section 4960. This form is filed with the Form 990 (return for tax exempt organizations) or Form 990-PF (return for private foundations). The Form 4720 excise tax is due by the due date for the Form 990/990-PF, not including any extensions.
Under Section 4960, when determining compensation which may trigger the excise tax, remuneration from “related organizations” must be included. These include any related person, organization or governmental entity that controls or is controlled by the tax exempt organization or is a “supported” organization under Code Section 509(a)(3). If the excise tax is due, it is apportioned among the related organizations, including the tax exempt organization, and each organization files and reports its own Form 4720 with its share of the excise tax. The Form 4720 instructions require that when the excise tax is shared among organizations, a statement should be attached to each Form 4720 with the name and EIN of all organizations paying the excise tax.
Preparation for 2018 Filing Year
Tax exempt organizations should confirm, with the advice of counsel if needed, whether they are “applicable tax-exempt organizations” within the meaning of Section 4960 and should identify their “covered employees”. Organizations can begin to identify what compensation may be included in Section 4960 remuneration, based on analogy to Code Section 280G. Under Section 4960, compensation paid to a licensed medical professional for the performance of medical or veterinary services by such professional is not included remuneration. For some organizations, this exclusion may not be easy to determine, especially if the compensation is not readily linked to the performance of these services in contrast to other services performed by the individual as part of the job.
Final 2018 tax forms have not yet been posted and are subject to change by the IRS when issued in final form. However, changes seem unlikely unless there is further guidance. The draft forms are available on the IRS website page for draft forms.