PRIVATE INUREMENT AND BENEFIT- THE BASICS
by Angela N. Crawford, CPA - Manager
The concepts of private inurement and private benefit in the exempt organization world are oftentimes the silent killer. Most exempt organizations must be organized so that no part of earnings benefit any private individual. Private inurement occurs when the benefit is reaped by an insider of the organization (i.e. an officer or board member). Private benefit is much broader and also includes benefits to unrelated individuals or for-profit entities.
Both private inurement and private benefit can jeopardize the tax exempt status of the organization. However in situations involving private inurement, before the IRS decides to revoke the exempt status, they punish the individual who receives the benefit, as well as any influential individuals of the organization who were aware of these excess benefits, with intermediate sanctions. Intermediate sanctions are serious- up to 200% of the excess benefit amount on the disqualified person and up to 10% on an organization manager.
Now that you are paying attention, following are a few common areas of concern.
Look at any 990 and you will see officer compensation on page seven. Look more closely at some of the questions and you will find that the IRS asks how compensation is established. If compensation for an officer exceeds $150,000, schedule J will expound upon that individualís compensation.
Regardless of the amount of compensation, compensation procedures need to be established. At a minimum, look at salary guides and other exempt organizationsí 990s. Form a compensation committee to conduct the salary study and have the board vote to approve salaries. The committee should consider relevant factors (i.e. individualís education, contribution to the success of the organization, cost of living) and document the all discussion arriving at the compensation amount.
Business Transactions with Interested Persons
Similar to compensation, business transactions with interested persons should be reasonable. Use due diligence when transacting business with a board memberís or officerís company. This extends to the board memberís and officerís families as well. Take note that the transaction may be reportable on the 990. As a good practice, the transaction should be voted on by the board, with the insider abstaining from the vote and excusing themselves from the discussion prior to voting.
While most people donít think of theft as private inurement, a person stealing from the organization is receiving benefits they did not earn. How an organization handles theft is vitally important. If the thief is a disqualified person (for example, an officer), the excess benefit rules apply. Remember that tax on organizationís managers? If the organization does not take appropriate actions with the disqualified person, and the managers are aware the appropriate actions were not taken, the managers of the organization are personally subject to a 10% tax. Thatís right, personally responsible. The organization cannot pay this tax.
All organizations are unique. If you have questions about how private inurement or private benefit may impact your organization, contact your accounting professional at Blue.
If you have any questions regarding the article above or any other issue affecting your not-for-profit organization please contact your Blue & Co. advisor or e-mail us at firstname.lastname@example.org or call us at 800-717-BLUE
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CIRCULAR 230 DISCLOSURE: To ensure compliance with recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including any attachments, is not intended or written by us to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the federal government or for promoting, marketing or recommending to another party any tax-related matters addressed herein.