IRS Looks to Limit Tax on Nonprofit Pay Above $1 Million

The Internal Revenue Service has proposed regulations that limit the scope of a tax on executive compensation at nonprofits, a rule included in the 2017 tax overhaul.

Under the law, nonprofits are subject to a 21 percent excise tax on their top five employees who receive salaries and benefits that exceed $1 million. In guidance issued last week, the agency suggested that nonprofits would not be subject to a tax on the salaries employees and board members make at related organizations.

The proposed regulations would exempt nonprofits from paying the tax on salaries that board members receive from for-profit corporations — payments that charities have no say-so on, said Alexander Reid, a tax lawyer who used to serve as counsel for Congress’s Joint Committee on Taxation.

“The tax should only apply to funds that are under the nonprofit’s control.” he said.

Often highly compensated corporate leaders bring years of experience and a contact list full of potential donors with them to a board seat, Reid said.

“These are precisely the people that you want to have on your board,” he said. “It’s a very scary prospect for nonprofits that the risk of a 21 percent excise tax might prevent these highly compensated individuals from serving.”

If made final, the proposed rule would make it easier for corporate executives to serve on corporate foundation boards, for employees of a private company to provide services for a family foundation, or for several related nonprofits to combine to pay the salary of a single person who works for all of the organizations.

To determine whether a nonprofit is liable for the tax, the proposed rule suggests that the highly compensated individual in question would have to spend more than 10 percent of his or her time, or more than 100 hours a year, working for the nonprofit.

Reid said he does not expect the IRS to make a final determination on the rule until after the November elections.