Nonprofit Advocates Hope Coach Tax Rules Ease Employee Confusion

March 26, 2020, 5:05 PM

Accountants and tax professionals are hoping for clarity regarding employees with multiple roles at an organization as they await rules on a new tax aimed at the compensation of top-paid nonprofit employees.

The Office of Information and Regulatory Affairs is reviewing the rules, typically the final step before the IRS will release them. Tax professionals have criticized the lack of clarity included in the tax overhaul provision, especially regarding pay for employees that provide services for a tax-exempt organization but also receive compensation for related work on the for-profit side.

The 21% tax applies to the top five employees of tax exempt organizations with income in excess of $1 million, as well as the five top employees from previous years making over $1 million. While Section 4960 tax is colloquially known as the “coach tax,” as written the law likely doesn’t apply to many public universities. Beyond five-star football programs, its already created headaches for tax practitioners at hospitals, museums and charities with for-profit arms.

“It’s hard to even imagine how many how many people that might impact,” said Phil Hackney a professor at the University of Pittsburgh School of Law.

People are looking for guidance on what is and isn’t a related entity of a nonprofit, said Ellen Aprill, chair of tax law at Loyola Marymount University Loyola Law School in Los Angeles.

Treasury has said the issue is one of the areas they are considering as they write the regulations. The only published guidance so far is (Notice 2019-09).

The American Institute of CPAs has asked Treasury to let tax-exempt organizations use a “reasonable allocation” method to determine the time an employee spends providing different service functions across an organization.

The group asked the IRS to allow organizations to only count pay related to the nonprofit’s mission, and highlighted an example in which a physician may provide services to patients and also teach students at a university.

Spencer F. Walters, a partner at Ivins Phillips Barker Chartered echoed those concerns, and said in a comment letter that Treasury should also limit the scope of the tax to income paid by the tax-exempt portion of an entity.

“Congress did not intend to tax corporations under Section 4960 merely because their employees also provide unpaid services to a related charitable foundation,” he wrote in the letter.

To contact the reporter on this story: Sam McQuillan in Washington at smcquillan@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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