Dive Brief:

• The American Institute of CPAs is calling on federal regulators to issue guidance surrounding changes made to Section 4960 of the U.S. tax code by the One Big Beautiful Bill Act last year. The changes expanded the definition of employees in tax-exempt organizations who are subject to a 21% excise tax on any compensation over $1 million they receive.
• Since OBBBA, all employees of applicable tax-exempt organizations are subject to the excise tax, not just the top five highest-grossing employees. In a letter submitted to the Internal Revenue Service penned this month, the accounting trade group requested the Internal Revenue Service provide those organizations with transition relief as well as clear exceptions that exclude certain covered employees such as interns or volunteers. 
• “Without this guidance, nonprofits and related organizations could face unexpected excise taxes, added compliance burdens and heightened financial risk under current law,” Scott Klein, senior manager of tax policy and advocacy at AICPA said in a statement included in a recent AICPA press release. 

Dive Insight:

The 2017 Tax Cuts and Jobs Act imposed a 21% excise tax on tax-exempt organizations that paid $1 million or more in remuneration to any of their five highest-paid employees. The excise tax — which took effect in the 2018 tax year and beyond — also applied to individuals who had been covered employees during the previous taxable year. 

The original provision has drawn some criticism. Elaine Waterhouse Wilson of the West Virginia University College of Law argued in a 2024 article published in the Loyola University Chicago Law Journal that the tax unfairly targets nonprofits. The provision is also flawed as a similar effort to use the tax code to keep for-profit compensation in check instead led companies to manipulate the structure of compensation to avoid tax without decreasing compensation, Wilson argued.  

“Section 4960 was never truly intended to regulate excessive compensation, but rather serves to reinforce harmful narratives about nonprofit wages while raising revenue from an already disfavored sector,” Wilson wrote, while also acknowledging that some senior executives at charities are overpaid.

Even if executive pay itself doesn’t exceed $1 million, certain tax-exempt organizations can find themselves on the hook for the excise tax, according to a report from public accounting firm DeanDorton. For example, a nonprofit which pays its president a salary of $800,000 and contributes $50,000 to a deferred compensation plan for ten years could have a tax bill of $63,000 the year it vests, DeanDorton writes.  

The recently amended section 4960’s definition of covered employees took effect at the start of the 2026 tax year and also covers individuals that were employed at the organizations since the 2017 tax year. 

AICPA, a trade group representing CPA professionals, said the amendment posed financial risks and compliance burdens to certain nonprofits and urged the IRS and the Treasury Department to issue new guidance that clarified the process. 

The group requested transition relief that would prevent the excise tax from being applied retroactively to remunerated wages that were paid before the OBBBA changes were enacted. 

It also asked the IRS to provide transition relief to organizations through regulatory exceptions to the law’s covered employee definition. Without such a change, some organizations could “feel forced to make major changes like restructuring their workforce, scaling back operations, or even shutting down entirely,” AICPA warned. 

The definition of a covered employee under the amendment needs additional clarity, the trade group stated. 

Part-time workers at an organization or people who worked there briefly, such as interns, dating back to 2017, could be permanently classified as a covered employee under the amendment, AICPA stated. That could cause organizations to face new indefinite tracking obligations or excise taxes down the road. 

“Absent a de minimis exception, both these individuals and the [applicable tax-exempt organization] and related entities could face outcomes that are wholly disproportionate to the nature and duration of the individuals’ service,” AICPA stated. 

Lastly, the group called for transition relief to employees of entities who provided services to tax-exempt organizations as volunteers. Tracking every volunteer that provided services to them since 2017 would create “an overwhelming burden” on the organizations, the trade group stated.