The Impact of Section 4960 Excise Tax on Nonprofit Compensation
We examine the effect of Internal Revenue Service code (IRC) section 4960 of the Tax Cuts and Jobs Act of 2017 (TCJA) which imposed a 21% excise tax on nonprofit employee compensation over $1 million per covered individual. Using a difference-in-differences analysis on IRS Form 990 data for almost 40 thousand nonprofit employee-year observations from 2015 to 2020, we find a lower growth rate for treated employee compensation post section 4960. Our results are robust to the use of alternative treatment specifications as well as control samples, e.g., employees earning more than $1 million but not covered under section 4960; medical professionals specifically exempt from section 4960. We also find that CEO turnover is higher for treated CEOs post section 4960. Our findings contrast those of prior research on Section 162, the parallel provision which applies to executive compensation in for-profit publicly listed firms, which found no decrease in compensation.
darryll jones