Companies that have a private foundation (or are otherwise related to a tax-exempt organization) should take immediate action to determine whether they owe an excise tax under new section 4960 of the Internal Revenue Code. Both publicly-traded and privately-held companies that have executives who serve as officers or employees of a private foundation controlled by the company are at particular risk, even if the executives receive no pay from the private foundation. Excise tax returns reporting liability under section 4960, and payments of any tax, are due by May 15 for calendar year taxpayers (although standard extension rules apply).
Section 4960, which was added by the Tax Cuts and Jobs Act effective for taxable years beginning on and after January 1, 2018, imposes a 21% excise tax on (i) remuneration that exceeds $1 million, and (ii) excessive severance (as defined in the statute) paid to covered employees of certain tax-exempt organizations. A covered employee is one of the five highest-paid employees of the tax-exempt organization for the year and anyone who was a covered employee in a prior year.
Under recent guidance from the Internal Revenue Service, amounts paid to executives by for-profit companies that are related to a tax-exempt organization are included when determining whether an executive is a covered employee, has remuneration in excess of $1 million, or has excessive severance pay. As a result, an executive who is an officer of a tax-exempt organization and receives pay over $1 million from the for-profit company may trigger the excise tax. Companies and tax-exempt organizations must use Form 4720 to report and pay taxes imposed under section 4960.
Read more about section 4960 in our legal alert from January.