Tax Planning
Navigating the New Excise Tax on Excess Executive Pay for Nonprofits
Recent IRS guidance under the One, Big, Beautiful Bill expands the definition of covered employees and widens excise tax responsibility—nonprofits must act fast.
By NomadicTax Research Team • 5-8 min read • July 22, 2026
## What’s Changing for Nonprofits under OBBB
The One, Big, Beautiful Bill (OBBB) introduced an **expanded definition of "covered employee"** under Internal Revenue Code Section 4960. Traditionally, this excise tax applied only to the top five highest-compensated officers of Applicable Tax-Exempt Organizations (ATEOs). Now, any employee earning more than **$1 million annually** may be subject to the tax. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-announce-intent-to-issue-proposed-regulations-for-excise-tax-on-excess-tax-exempt-organization-executive-compensation-under-the-one-big-beautiful-bill?utm_source=openai))
## Proposed Regulations & Transition Relief
Notice **2026-36** formalized the intent to issue proposed regulations to implement OBBB’s changes. ATEOs can still rely on certain exceptions—such as the “limited hours” or “nonexempt funds” rules—until more detailed guidance is released. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-announce-intent-to-issue-proposed-regulations-for-excise-tax-on-excess-tax-exempt-organization-executive-compensation-under-the-one-big-beautiful-bill?utm_source=openai)) The IRS has set a comment deadline for **August 4, 2026**. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-announce-intent-to-issue-proposed-regulations-for-excise-tax-on-excess-tax-exempt-organization-executive-compensation-under-the-one-big-beautiful-bill?utm_source=openai))
## Implications for Organizations & Leaders
- **More individuals exposed**: Formerly exempt executives earning over $1 million now count, not just the top five leaders.
- **Larger potential tax bills**: Excess parachute payments (severance packages, golden parachutes) may now trigger the excise tax.
- **Need for compliance audits**: Existing processes must adapt to consider expanded definitions and exceptions.
## Actionable Recommendations
1. **Review compensation thresholds**: Identify any employee who could be reclassified under the $1 million threshold.
2. **Evaluate existing employment contracts**: Ensure severance or bonus arrangements avoid or properly account for parachute payments triggering the tax.
3. **Seek legal/financial advice**: Tax-exempt organizations should work with advisors to apply upcoming regulations and plan for reporting and payment obligations.
## Example Scenario
A nonprofit previously had five high-paid executives subject to the excise tax. Under the new rules, its Chief Technology Officer, earning $1.2 million (but not among the top five), may now be considered a “covered employee.” If she receives a severance over a negotiated amount, the nonprofit could owe excise tax on that compensation unless it qualifies for an exception. IDing such roles now helps avoid unpleasant surprises later.
By staying ahead, nonprofits will better manage risks and ensure compliance as the IRS rolls out the finalized regulations.