Proposed Regulations & FAQs for Not-for-Profit Organizations to Keep on Their Radar

The IRS Releases Proposed Regulations on Wage Excise Tax and FAQs on NOL Carrybacks

The IRS has stayed busy during the pandemic, offering guidance to tax-exempt organizations. One area of assistance relates to the new 21 percent excise tax for excess compensation. Other guidance offers possible tax relief to not-for-profit organizations that generate a net operating loss (NOL) and might be able to recover prior years’ taxes with this NOL.

Excise Tax

As part of the Tax Cuts and Jobs Act (TCJA), Congress enacted IRC Section 4960. This section imposes a new excise tax of 21 percent on the amounts of wages in excess of $1 million that a tax-exempt organization pays to a “covered employee.” The IRS recently issued proposed regulations concerning interim guidance under IRC Section 4960. These proposed regulations clarified several issues, especially in the definition of covered employees, and will assist not-for-profit organizations in determining the amount of wages paid for a tax year; whether an excess payment is made and in what amount; and more.

Prior to these proposed regulations, the IRS released Notice 2019-09. This Notice may still be relied upon until the final regulations for Section 4960 are issued.

The IRS is seeking comments regarding these proposed regulations with a submission deadline of August 10, 2020. The proposed regulations would apply to tax years beginning on or after the date final regulations are released.

NOL Carrybacks

In response to the COVID-19 pandemic, Congress enacted the CARES Act, which changed certain aspects of NOLs. These changes permit NOLS arising in tax years beginning after December 31, 2017 and before January 1, 2021 (tax years 2018, 2019, and 2020) to be carried back five taxable years prior to the year of loss. This NOL carryback could thus generate a tax refund for a taxpayer incurring an NOL. The application of this NOL carryback presents unique opportunities for not-for-profit organizations, and the IRS addressed this in recently released FAQs about Net Operating Loss (NOL) carrybacks. This FAQ addresses the complexities resulting from the NOL changes introduced under the CARES Act and how these coordinate with Section 512(a)(6) for tax-exempt organizations with more than one unrelated trade or business.

Contact Us for More Information

For more information about how these changes may impact your not-for-profit organization, please get in touch with Sikich’s tax-exempt experts.


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