01 Jul 2025

No Cap: Expanding the Section 4960 Reach on Tax-Exempts under the One Big Beautiful Bill Act

Section 112020 of the “One Big Beautiful Bill Act” (OBBBA), House version, would expand the reach of the IRC § 4960 excise tax on compensation in excess of $1 million (equal to 21%, the corporate tax rate) paid to employees of an applicable tax-exempt organization (ATEO), removing the current cap that limits application to the five highest-compensated employees of the tax-exempt entity. The revised rule would instead apply to any current or former employee receiving compensation above the threshold, effective for tax years beginning after December 31, 2025. This structure resembles IRC § 162(m), which limits the deductibility of compensation paid by publicly held corporations to “covered employees”—defined as the PEO, PFO, and the three other highest-paid officers for the taxable year—and which, under IRC § 162(m)(3)(C), continues to treat these individuals as covered employees in all future years, even after they leave the company.

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