Reporting Your Credit Union’s Excise Tax Post-Tax Reform

By Aubrey Clegg, CPA – Senior Tax and Audit Manager, Financial Institutions Group

The Tax Cuts and Jobs Act (TCJA) imposed an excise tax on certain highly compensated employees of tax-exempt organizations, including credit unions. Specifically, a 21 percent excise tax is assessed on “remuneration” in excess of $1 million paid to each of a credit union’s covered employees. The excise tax applies to a credit union’s five highest compensated executives, plus any employees considered “covered employees” beginning in the 2017 tax year. The excise tax also applies to “excess parachute” payments on account of termination of employment, although the taxable threshold is far less than $1 million with respect to this type of compensation. Unlike the $1 million threshold on remuneration, the taxable threshold on excess parachute payments can be as low as $360,000.

Both state-chartered credit unions and federal credit unions are required to report remuneration subject to the 21 percent excise tax via Form 4720, Schedule N. State-charted credit unions will continue to report executive compensation on their annual Form 990, but also must now compete Form 4720.

Additionally, the Internal Revenue Services’ guidance revealed that 457(f) deferred compensation plans in place prior to the passage of the TCJA, will not be grandfathered in. This will likely require more credit unions to incur the new 21 percent excise tax for tax years during which substantial risk of forfeiture lapses.

Form 4720 and the associated excise tax is due May 15. With the deadline approaching, credit unions should start gathering their information to prepare the Form 4720 and determine how the additional tax may impact their organization. For assistance in preparing your credit union’s Form 990 or Form 4720, contact Doeren Mayhew Financial Institutions Group’s tax advisors today.