Tax Planning by Tax-Exempt Organizations: Evidence from Nonprofit Reactions to Section 4960

Do nonprofit organizations engage in tax planning? Leveraging the introduction of section 4960 of the IRC, an excise tax on remuneration over $1 million introduced in the Tax Cuts and Jobs Act, I investigate nonprofit tax avoidance practices. I posit that nonprofit boards engage in tax planning to avoid taxes and preserve mission funds, while retaining executive talent. Using a difference-in-difference design I find that in affected nonprofits, compensation growth slows, and the likelihood and value of other types of arrangements increases. Specifically, nonprofits are more likely to enter into or expand loan agreements with officers, creatively redesigning pay. The unintended consequences of taxing compensation may include less transparent and less comparable executive compensation in the nonprofit sector.