Use this button to switch between dark and light mode.

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

July 01, 2025 (4 min read)

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.

Read now »

Related Content

  • Expert Insights: TCJA Creates New Penalty Taxes for Tax-Exempt Entities
    Learn more about IRC § 4960. The Tax Cuts and Jobs Act (TCJA) imposed the restriction, in the form of an excise tax, on the ability of tax-exempt entities to pay certain amounts and types of compensation to specified highly compensated employees. Specifically, for tax years beginning after 2017, the TCJA imposed a 21% penalty tax on compensation (other than an excess parachute payment) exceeding $1 million that a tax-exempt employer pays to a covered employee. As amended by the TCJA, covered employees is defined to include any of the tax-exempt organization’s five most-highly compensated employees. 
  • Exempt Organizations: Unrelated Business Income Tax
    See how excise taxes are not the only tax that tax-exempt organizations may pay. A common misconception about an exempt organization is that its tax-exempt status means that the organization is exempt from all taxes. But its unrelated business income (UBI) is subject to taxation. There are three factors you will need to evaluate and determine if a tax-exempt is generating UBI. The income must be: (1) from a trade or business, (2) that is regularly carried on, and (3) is substantially unrelated to the organization’s exempt purpose.

Practical Guidance Updates 
Featuring the latest updates from your Practical Guidance account.    

PRACTICAL GUIDANCE CUSTOMER EMAIL EDITION ON THE WEB

Experience results today with practical guidance, legal research, and data-driven insights—all in one place.

Experience Lexis+

Tags: