Kutchins, Robbins & Diamond, Ltd. Certified Public Accountants and Advisors

Exempt Organization Status and Excess Benefit Transactions

The IRS has issued final regulations concerning the exempt status of organizations that are tax-exempt under Code Sec. 501(c)(3) but engage in excess benefit transactions. As an exempt organization, this development may affect you.

The final regulations clarify the substantive requirements for tax exemption under Code Sec. 501(c)(3) and the relationship between these requirements and the imposition of Code Sec. 4958 excise taxes on excess benefit transactions. The final regulations add an example that addresses the issue of reasonable compensation and illustrates the application of the revocation factors to an excess benefit transaction that is neither significant nor de minimis in comparison to the size and scope of the organization’s exempt activities.

Excess benefit transactions can occur with all transactions an exempt organization may engage in, including purchases and sales of goods and other property, leases, compensation paid to executives, employees and directors, grants paid, payment of expenses of private individuals, and so on. The regulations are lengthy and complex, and the consequences for violation of them are severe.

We would be happy to help you evaluate particular transactions, including compensation arrangements, past or planned, and determine whether you are at risk of operating in contravention of these rules. Should you be at risk, we can help you implement the appropriate safeguards. Contact us today to learn more. 

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