The tax reform law signed by President Trump just before Christmas means nonprofit organizations are in for some surprises.
Though it might yet prove fiscally irresponsible, the new tax law has been lauded by many not only for its tax cuts for corporations and individuals, but also for the fact that its expanded standard deduction has simplified tax planning for many, making itemizing of tax returns unnecessary beginning in 2018.
But the Tax Cut and Jobs Act hasn't simplified things for nonprofit organizations. Far from it. It's made things much more complex and, potentially expensive, especially when it comes to paying top leaders.
The new law, broadly, imposes a 21% excise tax on the amount of compensation that exceeds $1 million a year on the organization's top five executive salaries. But it's not that simple.
Many nonprofits don't know how far their tax liability might yet reach, say two attorneys who have studied the law's effects on nonprofit executive compensation.
In subsequent years, many more executive salaries could be ensnared in the excise tax net.
"This provision, this 21% excise tax, once you start getting into it, is not going to be an easy provision to comply with," says Jacqueline Henson, an attorney and specialist in tax-exempt organizations with the Washington, D.C., office of the Baker Donelson law firm. "It will make life difficult not necessarily for the largest of the largest organizations, but for the mid-sized. I don't think nonprofits know what's going to hit them yet."
Leveling the playing field?
The new excise tax was an attempt by Congress to curb some of what many find egregious compensation levels (see college football coaches) for what are supposed to be charitable organizations.
Therefore, Congress mirrored the nonprofit excise tax on a similar tax that applies to public for-profit companies.
But the law will ensnare many more than just the biggest nonprofits.
"On the surface, it looks like you're lining them up to compete on a level playing field [with for-profits] but that's not really what's going on," says Bill Robinson, an attorney with Baker Donelson, who specializes in compensation and benefits. "The mid-size nonprofits, who may pay a million in compensation, might be competing with private companies, who aren't subject to this rule, and that puts these folks at a disadvantage."
Philip Betbeze is the senior leadership editor at HealthLeaders.