The American Institute of CPAs is urging the Treasury Department and the IRS to provide transition relief and comprehensive guidance regarding Section 4960 of the tax code, amended last year by the One Big Beautiful Bill Act, that imposes an excise tax on applicable tax-exempt organizations.
The Section 4960 excise tax on excess executive compensation that is imposed on exempt organizations was enacted by the 2017 Tax Cuts and Jobs Act.
The provision levies an excise tax on ATEOs equal to 21% of the remuneration in excess of $1 million paid to “covered employees” of the exempt organization.
In a May 1 letter to Treasury and the IRS, the AICPA requested transition relief be issued to address potential problems that could disrupt the operations of tax-exempt organizations.
“Given the scope and magnitude of the changes made by the OBBBA to section 4960, we recognize and appreciate the need for comprehensive guidance. However, we respectfully urge Treasury and the IRS to prioritize the issuance of transition relief to address several immediate issues that could disrupt the operations of tax-exempt organizations,” Cheri Freeh, chair of the AICPA Tax Executive Committee, wrote in the letter. “Absent timely transition relief, these issues may result in significant and unintended financial exposure for tax-exempt organizations and related entities subject to the section 4960 excise tax.”
When first enacted, the definition of a “covered employee” under Section 4960 was limited to the top five highest-compensated employees of the ATEO, in addition to any individual who would have been a covered employee in a prior taxable year, according to the AICPA.
Section 70416 of the OBBBA amended Section 4960 to expand the definition of a “covered employee” to include all employees of an ATEO (not only the top five highest-compensated employees), including any individual employed during any taxable year beginning after Dec. 31, 2016. This change is effective for the first taxable year beginning after Dec. 31, 2025.
The AICPA’s letter offers the following recommendations on issues emerging from the OBBBA’s revisions to Section 4960:
- Provide transition relief for fiscal year applicable tax-exempt organizations: Applying transition relief would prevent the tax from being applied retroactively to remuneration paid prior to the enactment of OBBBA changes.
- Provide transition relief for applicable tax-exempt organizations and related entities utilizing the current regulatory exceptions to the definition of covered employee: Without updated government guidance, some organizations may feel forced to make major changes like restructuring their workforce, scaling back operations, or even shutting down entirely.
- Provide transition relief for de minimis employment prior to enactment of the OBBBA: People who briefly worked or worked part‑time for certain ATEOs, such as interns, as far back as 2017 could be permanently classified as covered employees, triggering indefinite tracking obligations and excise tax for related organizations years later, without any ability to anticipate these consequences. Absent a de minimis exception, both these individuals and the ATEO and related entities could face outcomes that are wholly disproportionate to the nature and duration of the individuals’ service.
- Transition relief for employees of related entities providing services as traditional unpaid volunteers of an applicable tax-exempt organization: Without this transition, it could create an overwhelming burden on ATEOs, which would then have to track every volunteer that provided services to the ATEO, potentially retroactive to Jan. 1, 2017, to ensure that neither the ATEO nor a related entity had failed to identify a covered employee.
“Our letter requests guidance providing transition relief for fiscal-year filers; extension of the limited hours, nonexempt funds, and limited services exceptions; and a clear regulatory exception so unpaid public volunteers are not treated as covered employees,” Scott Klein, senior manager of tax policy and advocacy at the AICPA, said in a statement. “Without this guidance, nonprofits and related organizations could face unexpected excise taxes, added compliance burdens, and heightened financial risk under current law.”
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