The 2017 Tax Act (the “Act”) imposes a 21 percent excise tax on compensation in excess of $1 million and “excess” severance paid by covered tax exempt organizations to certain employees starting in 2018.  As reflected in the Act’s legislative history, the general intent behind this excise tax is to put tax exempt organizations (which are generally exempt from income taxation) in roughly the same position tax-wise as publicly held and other for-profit companies which cannot deduct excess compensation and “golden parachute” payments paid to their covered employees.   However, unlike the changes made in the Act to the excess compensation rules for publicly traded companies, there is no transition relief for existing tax exempt organization compensation arrangements.  This means that the new excise tax will apply to all compensation paid by a covered organization to a covered employee in tax years beginning after 2017.

Set out below is an overview of the scope and application of the new excise tax provision.

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