Leaders of not-for-profit organizations have always pondered over how much compensation to offer to top executives, management chiefs, and vital employees. Factored into this quandary is the fact that the board must consider compliance with the convoluted IRS regulations and rules regarding executive compensation.
As with other government-regulated mandates, if an organization reports excessive compensation it could suffer extensive fines and may even lose its tax-exempt status.
The IRS is focusing a critical eye on executive compensation packages. With the enactment of the Tax Cuts and Jobs Act of 2017, which imposes a 21% excise tax on certain not-for-profit organizations that allocate more than $1 million annually to their executives, complete disclosure of compensation is essential. The following are a few of the ways the IRS and the public are scrutinizing tax-exempt compensation arrangements.
IRS Form 1023
When an organization initially files a Form 1023 to earn exempt status, it must include with the application a summary of executive compensation. Section V of Form 1023 requests details on financial plans with executives. The disclosures include earnings for each of the 5 highest-compensated employees receiving $50,000 or more annually, and for each of the 5 highest-compensated independent contractors.
Required Declarations for the highest-compensated employees and independent contractors
Name and title
Mailing address
Total actual or estimated earnings
Business and family relationships among those compensated
Explanation of how the organization determines compensation
Flexible, non-fixed compensation arrangements
How the organization handles payments from other organizations regarding the filing organization’s common control
Policies related to conflict of interests and how the organization handles conflicts that may impact compensation
Information provided in Part V of Form 1023 may provoke additional questions from the IRS before it approves the Tax Exemption Application.
IRS Form 990
IRS Form 990 also focuses on executive compensation. This form contains several inquiries concerning executive compensation. Form 990 Part VI requires declarations of family and business alliances among the organization’s executives, and conflict of interest guidelines and particulars about policies for establishing compensation.
Form 990 Part VII, Section A focuses on reimbursement for executives and key employees (both current and former). Form 990 Part VII requests executives’ names, titles, hours worked per week, position, and Form W-2/1099-MISC and other payments from the organization and associated organizations.
Total compensation from all sources reported on Form 990 Part VII, Section A can initiate additional compensation disclosures on Schedule J. In Part VII, Section B requires declarations from the organization about the five highest-compensated independent contractors receiving more than $100,000.
These essential disclosures on Form 990 must comply with the compensation disclosures demanded by the form’s instructions. It is important for the organization submitting the Form 990 to know the terms and definitions the form uses.
Stay In-touch with Your Accountant
You do not want your organization to lose its tax-exemption. To avoid any problems or worrisome situations, keep in close touch with your accountant. Your accountant can steer you in the right direction and help you maintain your not-for-profit status. This relationship is important for accurate and prompt reporting, and your accountant can alert you of any impending situations.
When your organization comes across perplexing information and you have questions--we are here with the answers. Keep in touch with our blog. We have ideas to share and solutions to management and organizational questions. If you have questions about any other not-for-profit industry topics, contact our not-for-profit team leader at trent@tbfosteraccounting.com.