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Dangerous Transactions To Avoid

Quick Guide to Form 990, Schedule L Reporting

Certain transactions can be considered automatic issues for an organization if conducted with an interested person. Transactions providing an economic benefit that exceeds the value of considerations given are known as excess benefit transactions and can create a large penalty for the individuals and organization involved. Safeguard your organization from significant penalties by avoiding the following three categories:

Automatic Excess Benefit Transaction

  • Unreported compensation (see listing below)
  • Payment from a donor-advised fund to a disqualified/interested person
  • Payment from a supported organization to an interested persons

Unreported economic benefits that should have been treated as compensation are considered automatic excess benefit transactions. Not carefully reporting the following types of economic benefits would create excess benefit transactions.

  • Salary and fees, in general
  • Discretionary bonus
  • Automobile used for personal purposes
  • Expense allowances or reimbursements not under an accountable plan
  • Season tickets to sporting or theatrical events
  • Membership in a private country club or athletic facility regardless of the frequency of usage by the employee
  • Use of employer-owned or leased facilities (such as an apartment, hunting lodge or boat) for a weekend
  • Severance payments
  • Deferred compensation earned during the relevant period
  • Payments to welfare benefit plans (such as plans providing medical, dental, life insurance, severance pay, and disability benefits)
  • Insurance premiums (health, liability, disability, etc.) for the person and/or his or her family
  • Payment or reimbursement of an expense that is not reasonable incurred by a disqualified person in connection with a civil judicial or civil administrative proceeding arising out of his performance of services for the organization
  • Payment or reimbursement of any expense resulting from an act or failure to act when a disqualified person acted willfully and without reasonable cause
  • Payment or reimbursement of any penalty, tax, or expense of correction owed under IRC Sec. 4958, or the payment of premiums on insurance that provides such payment or reimbursement
  • Payment or reimbursement of professional fees of a disqualified person or organization manager pertaining to an act or failure to act under IRC Sec. 4958; and the person acted willfully and without reasonable cause
  • The economic benefit of a below-market loan [within the meaning of IRC Sec. 7872(e)(1)], except where the loan is part of an initial contract.
  • Lodging furnished for the convenience of the employer that is tax-exempt to the employee under IRC Sec. 119

The following are not considered to be compensation for excess benefit transactions:

  • Fixed salary or bonus payment made pursuant to an initial contract
  • Nontaxable fringe benefits excluded from income under IRC Sec. 132 (except that any liability insurance premium, payment, or reimbursement is generally considered in determining reasonable compensation)
  • Expense reimbursements under an accountable plan
  • Certain economic benefits provided to volunteers for, members of, or contributors to the organization
  • Payment or reimbursement of professional fees of a disqualified person or organization manager arising from an IRC Sec. 4958 matter, in general

If you think you have provided economic benefit to an interested person of your organization and need assistance correcting the issue or have additional questions regarding excess benefit transactions, contact us and we can assist.

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