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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3919
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Does the IRS forbid a 501 C 3 Cooperation from having a paid

Resolved Question:

Does the IRS forbid a 501 C 3 Cooperation from having a paid board member? If a board member is a salaried officer, can he/she sit on the board?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi ... That answer is NO, But .....

NPVAdvisor :

It all starts with "reasonableness." The IRS requires compensation packages for nonprofit executives (and other nonprofit employees, for that matter) to be reasonable.

NPVAdvisor :

AND they don't define reasonable, not in terms of a definition ... it comes more in the form of the "facts and circumstances" of each situation

NPVAdvisor :

Reasonable compensation is best understood in light of factors the IRS examines when determining whether or not a charity is exceeding reasonableness with its compensation arrangements. These factors look something like this:



  • Actual job description

  • Required level of education or experience

  • Compensation averages in your area

  • Number of hours worked

  • The overall budget of the charity

NPVAdvisor :

There are legitimate, charitable organizations whose executives make up to, and sometimes more than, $250,000. For a very select few, a lot more. But I'll put it this way…if you have an employee whose compensation package exceeds $100,000, you better be prepared to defend it.

NPVAdvisor :

But, yes, if the duties of that employee and the salary are commensurate ... AND sitting on the board (even with additional salary) still allow the charity to push through more that 70% of inflow to the cause itself, you'll be in a pretty good position

Customer:

Does a state's (MASS) Attorney General have the right to object to a board member being a paid officer? or is that the IRS's issue?

NPVAdvisor :

One more thing ... and I'll shut up and let you ask questions, but due diligence in supporting that reasonableness is key:

NPVAdvisor :

Due diligence is the brother of reasonable compensation. In order to have a compensation package considered truly reasonable, the figure must be the result of a substantive evaluation of what makes sense for the job. That is the responsibility of the board of directors or compensation committee. It is considered a best practice to document the method used to determine salary packages. There are various resources that can be used to come up with the information: The Labor Department, census data, job-oriented websites, national and local charities, etc. It’s best to use multiple sources.

NPVAdvisor :

On your question ...

NPVAdvisor :

That is the IRS' issue, in terms of maintaining exempt status, but the corporation itself also has to conform with the state law around the business entity itself

NPVAdvisor :

Organizational/entity law is a secretary of state/state statute issue

NPVAdvisor :

Tax exempt status is an IRS issue

Customer:

thanks

NPVAdvisor :

your welcome

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3919
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks much Rick.

here's an excellent resource:

http://www.501c3.org/blog/nonprofit-executive-compensation/

Lane

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