Highly paid college sports coaches and hospital executives are among the nonprofit employees the Internal Revenue Service is targeting in the final version of a tax-law regulation.
The IRS issued
One of those was a 21 percent excise tax on some nonprofit employees getting $1 million or more in salary. It’s designed to take a portion of the compensation for many well-paid private college coaches, as well as nonprofit hospital executives.
Coaches of well known teams like Duke University basketball’s Mike Krzyzewski, who was reported getting nearly $7.3 million in 2019, and Notre Dame football’s Brian Kelly, who got nearly $1.9 million, could be among those affected. Compensation for Mount Sinai Hospital’s Kenneth Davis and Yale New Haven Hospital’s Marna Borgstrom could similarly be hit.
The 2017 law included a tax on a nonprofit’s five highest-paid employees earning $1 million a year or more. It targets many elite college basketball and football coaches but also applies to all tax-exempt organizations under the IRS code’s Section 501.
Money raised
The new levy is expected to raise $1.8 billion over a decade, according to Congress’s nonpartisan scorekeeper, the Joint Committee on Taxation.
There’s a big loophole: The law doesn’t apply to employees at many public colleges. Those institutions can claim tax-exempt status as a government unit, and not as a Tax Code Section 501 organization.
The organization, not the employee, pays the tax to the IRS. They’ve been on the hook for this tax since 2018, but the new rules now give nonprofits clarity about how to calculate their employee’s wages, bonuses and other compensation to determine if they’re required to pay it.
The rules also include some carve-outs that will help some employees who split time between a for-profit and nonprofit organization. The rules include a “limited-hours exception” for employees who spend fewer than 100 hours or 10 percent of their time working at the nonprofit arm of a corporation.
Some exceptions
The exceptions in the rules help eliminate “what could be traps for the unwary where you could trigger the tax when it doesn’t seem there is any policy-related reason to,” Chris Moran, a tax lawyer at law firm Venable, said.
The tax will affect a relatively small number of people, said Brian Galle, a law professor at Georgetown University. “At most” the salaried of a few thousand individuals will be covered by the IRS’s rules, he said.
The IRS’s language exempts employees at larger organizations who perform work at a nonprofit arm of their employer but don’t draw pay for it.
The guidance also addresses excise levies on so-called parachute payments, or generous severance pay that roughly equals or exceeds three times the person’s base salary.
The IRS put out preliminary guidance in December 2018, which confirmed that public colleges and universities aren’t subject to the tax if they don’t have a 501 designation. It even advised that public schools with tax-exempt status could relinquish that as a way to avoid the tax.
The excise-tax provision aligns some of the tax rules for nonprofits with that for public corporations. Public companies can’t deduct compensation greater than $1 million for certain employees and are now subject to an excise levy of 21 percent.
Private universities also saw their endowments tapped as a way to pay for the 2017 tax overhaul. The law put a 1.4 percent excise tax on the net investment income of private schools with endowments of at least $500,000 per student. That hit some of the richest schools including Harvard, Yale and Stanford Universities.
