Out of a concern to discourage improper private benefit from corporate jets or lavish corporate apartments, the IRS is taking a closer look at expenses reimbursed outside of typical parking reimbursement and modest meeting refreshments. Most organizations have guidelines for which employee and board expenditures are reimbursable. In order for employee and organizational clarity, and by IRS suggestion, it is recommended that nonprofits adopt a payment and reimbursement policy.
Legal Authority
Similar to executive compensation policies, nonprofits are allowed to pay “reasonable compensation for services rendered.” Treas. Reg. § 53.4958-6. Expense reimbursements and payments are not considered compensation or income when expended for a business purpose in federal tax law. 26 U.S.C.A. § 62 (2009). Accordingly, nonprofit employers are allowed to reimburse ordinary and necessary expenses incurred while carrying out the organization’s activities. This might include the cost of travel, lodging, and meals. 26 U.S.C.A. § 162(a) (2009). However, in order to fully capture this tax benefit, payments should be made in a manner consistent with federal regulations that outline required elements of an “accountable plan.”
An accountable plan is a procedure used for reimbursing employees for expenses such as meals, entertainment, travel, and transportation incurred for business purposes on behalf of an employer. A plan is an accountable plan if the employer requires the employee to adequately account for all business expenses and to return any excess reimbursements. For employees under an accountable plan, reimbursements are not entered on the tax return as income and the expenses are not deductible. If an accountable plan is not followed, expenditures are reportable as taxable income to the individual employee receiving reimbursement and additional taxes must be withheld.
Form 990 Disclosures
Part VII of the IRS Form 990 requires organizations to report compensation of officers, directors, trustees, key employees, highest compensated employees and independent contractors. In addition to the required listing, questions three, four and five require disclosure about former persons affiliated with the organization, sum of reportable compensation and accrual of unrelated organization compensation. If the answer to any of these questions is “yes”, a requirement to complete Schedule J is triggered.
Schedule J of the Form contains questions regarding compensation for certain officers, trustees, key employees and highest compensated employees. Part of the compensation inquiry includes questions on fringe benefits.
- (A) Check the appropriate box(es) if the organization provided any of the following to or for a person listed in Form 990, Part VII, Section A, line 1a. Complete Part III to provide any relevant information regarding these items.
__ First-class or charter travel
__ Travel for companions
__ Tax indemnification and gross-up payments
__ Discretionary spending account
__ Housing allowance or residence for personal use
__ Payments for business use of personal residence
__ Health or social club dues or initiation fees
__ Personal services
- (B) If line 1a is checked, did the organization follow a written policy regarding payment or reimbursement or provision of all the expenses described above? If “No,” complete Part III to explain.
- Did the organization require substantiation prior to reimbursing or allowing expenses incurred by all officers, directors, trustees, and the CEO/Executive Director, regarding the items checked in like 1a?