Case Studies
Real-World Case Study: U.S. Tax-Exempt Organizations & Executive Compensation Under New IRS Notice
IRS’s Notice 2026-36 under the One, Big, Beautiful Bill significantly expands how excise tax on executive pay applies—learn via a detailed case study what this will mean for nonprofits and charities.
By NomadicTax Research Team • 5-8 min read • August 14, 2026
## Background: What’s changing for tax-exempt organizations
Under the **One, Big, Beautiful Bill** (OBBB), the IRS has broadened the scope of the excise tax on excessive compensation and “excess parachute payments” for tax-exempt organizations (ATEOs). Notice 2026-36 announced proposed regulations to expand the definition of **covered employee** beyond simply the top five highest paid—now any employee with compensation over **USD 1 million** per year may be affected. Volunteering roles and certain exceptions for non-exempt funds or limited hours may still apply. ([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))
## Case: CharityPlus—a nonprofit in the U.S.
**Scenario:** CharityPlus, a mid-sized nonprofit, with 8 employees. Two executives make USD 1.2 million/year, and one mid-ranking senior manager makes USD 950,000. Under prior rules, only the top five highest-paid employees are “covered employees.” Under the new proposal, **both executives** are covered, and possibly the senior manager if including parachute or termination payments pushes total compensation above USD 1 million.
### Potential implications
- CharityPlus might owe excise tax on **excess compensation** (amounts above “reasonable” compensation thresholds) for both executives.
- If there are parachute payments (severance or termination pay linked to change in control or similar events), they could attract additional tax as “excess parachute payments”.
- Must ensure careful documentation of board and compensation committees and limit generous severance arrangements.
## How nonprofits can prepare
- **Conduct compensation benchmarking**: Ensure salaries are justified based on size, mission, comparable nonprofits.
- **Audit severance agreements and parachute pay clauses**: Limit excess payments and ensure good governance.
- **Review volunteer policies**: Ensure that exceptions for volunteer work are properly documented so exempt from these rules when applicable.
- **Monitor proposed regulations**: IRS has requested comments; nonprofits should consider filing or coordinating comments to shape final rules. ([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))
- **Incorporate in budgeting**: Estimate potential excise tax exposure, including compensation above thresholds, to forecast financial impact.
## Key takeaways
- The expansion means **more employees** may be classified as covered and thus subject to excise tax rules.
- Governance and documentation are critical—boards should review compensation policies now.
- Nonprofits previously safe under “top five” may now find multiple employees subject to excise tax in a single year—so risk management matters.
- Proposed rules are not yet final—stakeholder comments due date was August 4, 2026—but affected entities should begin preparing now. ([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))