Inurement/Excess Benefits

Federal tax law allows a public charity 501(c)(3) to make payments to insiders as long as the amounts are reasonable and the goods and/or services are actually rendered. 

When a charity pays unreasonable compensation, or allows insiders to exploit the charity with "sweetheart" deals, the IRS calls this "inurement."  501(c)(3) does not allow any part of an organization’s net earnings to inure to the benefit of a private shareholder or individual.  Inurement can result in revocation of a 501(c)(3) organization's exempt status.

Revocation of an organization's tax exempt status often seemed too drastic, given the good that non-profits can do, so in 1996, Congress enacted section 4958 of the Internal Revenue Code, imposing a tax on "Excess Benefit" transactions.  The IRS can now impose fines on insiders who receive, and on board members who approve, unreasonable payments.  (In extreme cases, the organization can still lose its tax exempt status.) 

If insiders will receive compensation of any kind, it is imperative for the board to rely on independent data to insure that any payments made are fair.  Never let a board member vote on his or her own compensation or on the compensation of anyone related to him or her. Fully document the decision-making process in the minutes, including copies of all relevant information - salary surveys, job descriptions, résumés, prior salary history, independent appraisals, etc.

Prepare Your Own 501(c)(3) Application

By Sandy Deja © 2020  400 pages ISBN 978-1-7340724-1-9​


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Inurement/Excess Benefits