Personal and business Tax
Nova Tax and Accounting Services logo – tax preparation and nonprofit accounting in Ashburn, Virginia

OBBB Act Expands Excise Tax on Nonprofit Executive Compensation

The One, Big, Beautiful Bill (OBBB) enacted in 2025 significantly expanded the application of the excise tax on excess compensation paid by tax-exempt organizations. On June 5, 2026, the Department of the Treasury and the Internal Revenue Service issued Notice 2026-36 announcing intent to issue proposed regulations addressing this expanded tax . For nonprofit organizations in Virginia and across the country, understanding these changes is essential for compliance and governance.

What Has Changed

Previously, the excise tax on excess compensation applied only to the five highest-compensated employees of an applicable tax-exempt organization (ATEO) for the tax year . Under the OBBB, the tax may now apply to any employee with compensation exceeding $1 million in a tax year or receiving an excess parachute payment .

Expanded Definition of Covered Employee

Notice 2026-36 clarifies that the amended definition of covered employee, which will be addressed in forthcoming proposed regulations, includes two categories :

  1. Any individual who was an employee of an ATEO in any tax year beginning after December 31, 2016, and on or before December 31, 2025, if the individual was a covered employee for the tax year under prior law; and

  2. Any individual who is an employee of an ATEO in any tax year beginning after December 31, 2025 (unless a covered employee exception applies).

Important Exceptions

The notice also sets out important exceptions for individuals who provide volunteer services to tax-exempt organizations that could otherwise be impacted by the OBBB changes . Specifically, it allows ATEOs and their related organizations to rely on the limited hours and nonexempt funds exceptions to the post-OBBB definition of covered employee until further guidance is issued .

What Nonprofits Should Do Now

Treasury and the IRS anticipate that forthcoming proposed regulations will include covered employee exceptions for limited hours and nonexempt funds . The proposed regulations are not expected to apply to tax years beginning before the issuance of final regulations.

Organizations should review their compensation practices and identify any employees who may be affected by the expanded definition. Comments on all aspects of Notice 2026-36 and any other issues that should be addressed in the forthcoming proposed regulations are due by August 4, 2026 .

IRS Chief Executive Officer Frank J. Bisignano stated: “The new law strengthens the accountability of tax-exempt organizations by expanding tax compliance requirements for certain organizations paying excessive compensation and excess parachute payments to their executives” .

For more information, see the IRS One, Big, Beautiful Bill Provisions .

At Nova Tax & Accounting Services , our Form 990 preparation and nonprofit compliance services help organizations navigate these new requirements. Schedule your free consultation to discuss how these changes affect your organization.