On June 9, 2020, Chris Moran was quoted in Bloomberg Law on proposed rules released last week that offer a number of exceptions to limit the 21% tax aimed at the highest-paid employees at nonprofits.
According to the article, a major problem area that the nonprofit sector saw with initial IRS guidance was that people with limited involvement in an organization could end up triggering the tax—individuals, for example, who work for corporations but volunteer at a related charity, or individuals who do limited work at a nonprofit.
As long as the nonprofit doesn’t pay the person, the proposed "limited-hours" exception says the tax will be triggered only if the individual spends more than 10% of their time, or more than 100 hours, at the nonprofit. The exception should cover a common situation: corporate executives who volunteer at a company foundation, with no compensation and for a limited number of hours, said Moran.
The rules also create a non-exempt funds exception for employees of a controlling taxable organization that perform more substantial work at the applicable nonprofit. An employee won’t be considered one of the nonprofit’s five highest-compensated for a taxable year if neither the nonprofit, nor any related nonprofit, gives the employee any compensation for the service.
The limited-hours and non-exempt funds exceptions should be reviewed closely, Moran said. In some situations, a corporate foundation may reimburse the company for the time that the executives spend there, which could trigger tax, he said. Or a corporate executive may not be paid by the related foundation, but may spend more than half of their time on foundation matters.
Click here to access the article.