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July 26, 2018

Draft 2018 Form 990 adds questions regarding Section 4960 and 4968 excise taxes

The IRS has released a draft version of the 2018 Form 990 (Return of Organization Exempt from Income Tax) that adds two new questions regarding the Section 4960 compensation excise tax and the Section 4968 net investment income tax. An affirmative answer to either question, in turn, will require the organization to complete an additional schedule on Form 4720 (Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code).

Background on Sections 4960 and 4968

The Tax Cuts and Jobs Act of 2017 (TCJA) enacted numerous tax changes for tax-exempt organizations, individuals and businesses. For a detailed discussion of the TCJA provisions affecting tax-exempt organizations (including those highlighted below), see Tax Alert 2017-2142.

Section 4960

For tax years beginning after December 31, 2017, new Section 4960 requires most tax-exempt organizations to pay a 21% excise tax on remuneration (excluding remuneration paid to a licensed medical professional for medical or veterinary services) in excess of $1,000,000 paid to a "covered employee" within a tax year. The term "covered employee" includes any of the five highest paid employees for the organization's first tax year beginning after December 31, 2016, and for each subsequent tax year.

Section 4960 also requires most tax exempt organizations to pay a 21% excise tax on any "excess parachute payment" paid by the organization to a covered employee. Generally, an excess parachute payment is a payment (or series of payments) contingent on an employee's separation from employment with a present value equal to or great than three times the employee's average compensation over the prior five-year period (the base amount). The amount subject to the excise tax is the excess of the payment over the base amount.

The IRS added guidance related to the new Section 4960 excise tax to its list of priority guidance projects included in the second quarter update to its 2017-18 Priority Guidance Plan (released in February 2018). See Tax Alert 2018-0327.

Section 4968

Section 4968 imposes a 1.4% excise tax for each tax year on the net investment income of an "applicable educational institution". In general, the tax applies to private colleges or universities with at least 500 full-time tuition-paying students (more than half of whom are located in the US) that have endowments of at least $500,000 per student. Net investment income for purposes of Section 4968 is determined using rules similar to the rules of Section 4940(c) that relate to the tax imposed on net investment income of private foundations.

In Notice 2018-55, the IRS announced that it plans to issue proposed regulations under which applicable educational institutions subject to the new Section 4968 investment income tax may, in certain circumstances, use a stepped-up basis for property sold for gain. See Tax Alert 2018-1220.

New reporting in draft 2018 Form 990

The changes in the draft 2018 Form 990 appear in new lines 15 and 16 of Part V, "Statements Regarding Other IRS Fillings and Tax Compliance."

Line 15 asks whether the filing organization is subject to the Section 4960 excise tax on payments of more than $1,000,000 in remuneration or any excess parachute payments during the year. If so, it instructs the organization to file Form 4720, Schedule N.

Line 16 asks whether the filing organization is subject to the Section 4968 excise tax on net investment income. If so, it instructs the organization to file Form 4720, Schedule O.


The tax-exempt organization community has been awaiting IRS guidance on the reporting requirements under Sections 4960 and 4968 because they are expected to create a significant compliance and financial burden for organizations subject to the excise taxes. The draft 2018 Form 990 provides the first indication of how impacted organizations will fulfill their respective reporting requirements.

The draft 2018 Form 990 includes lines 15 and 16 of Part V, which refer organizations with affirmative responses to complete Schedule N and/or Schedule O of Form 4720, respectively. By creating new schedules on Form 4720, it can be inferred that the IRS will require organizations to report information that goes beyond the amount of tax due. However, the extent of the information to be reported is not yet known because the IRS has not released a draft of the 2018 Form 4720.

In addition, because Form 4720 is an annual filing requirement that is due at the same time as an organization's Form 990, it can be inferred that the exempt organization will not have to report excise taxes under Sections 4960 and/or 4968 on a quarterly basis. Generally, excise taxes must be paid annually at the time the return is filed, although an organization may choose to make quarterly estimated tax payments.

Another matter of uncertainty surrounding Form 4720 reporting is whether the form is subject to public disclosure. Currently, Form 4720 must be disclosed by "foundations" per Internal Revenue Manual section However, it is unclear to what extent this disclosure requirement will apply to other tax-exempt organizations filing Form 4720, which could add additional scrutiny to the information being reported.

As a result of Section 4960, applicable tax-exempt organizations will likely need to maintain detailed records on numerous individuals due to the requirement that, once an employee is determined to be a "covered employee," the employee remains a covered employee for future tax years. Notably, for healthcare organizations, compensation paid to qualified medical professionals for services rendered in the course of providing medical or veterinary services is not included in the calculation of remuneration for purposes of determining the $1,000,000 threshold. Going forward, tax-exempt organizations that may be subject to this provision would need to closely monitor the amount and timing of compensation payments to their employees.

Section 4968 effectively treats certain colleges and universities as private foundations subject to the Section 4940 excise tax on net investment income, even though the university may itself be classified as a public charity. Also, certain organizations that may not consider themselves to meet the definition of an "applicable educational institution," such as academic medical centers, may still be subject to this tax.

As tax-exempt organizations await further guidance regarding Section 4960, we encourage potentially impacted organizations to review their compensation arrangements and consider taking action to minimize potential excise tax, such as modifying the vesting schedule for deferred compensation. In addition, educational institutions should review the Section 4968 criteria outlined above to determine the extent to which they may be subject to the excise tax. Those organizations potentially impacted should take steps now to mitigate the compliance and financial impact that these new sections impose.

Please contact your Ernst & Young LLP tax professional with any questions.


— For more information about EY's Exempt Organization Tax Services group, visit us at


Contact Information
For additional information concerning this Alert, please contact:
Exempt Organization Tax Services
Terence Kennedy(216) 583-1504;
Steve Clarke(202) 327-6064;
Mackenzie McNaughton(612) 371-6371;
Melanie McPeak(813) 225-4950;
Scott Tidwell(858) 535-4461;
Jameson Sauseda(512) 542-7758;


Other Contacts
Exempt Organizations Tax Services Markets and Region Leadership
Mark Rountree, Americas Director, Americas Markets Leader and Health Sector Tax Leader – Dallas(214) 969-8607;
Bob Lammey, Northeast Region and Higher Education Sector Leader – Boston (617) 375-1433;
Bob Vuillemot, Central Region – Pittsburgh(412) 644-5313;
John Crawford, Central Region – Chicago(312) 879-3655;
Debra Heiskala, West Region – San Diego(858) 535-7355;
Joyce Hellums, Southwest Region – Austin(512) 473-3413;
Kathy Pitts, Southeast Region – Birmingham(205) 254-1608;