In the realm of nonprofit organizations, missteps in financial transactions can lead to serious legal and reputational consequences. One area where such missteps commonly occur is in the handling of “excess benefit transactions.” This term refers to transactions wherein an economic benefit provided by a nonprofit organization to a disqualified person exceeds the value of the benefit received by the nonprofit.
An understanding of the excess benefit transaction rules is fundamental for nonprofit organizations. These rules can be found in 26 U.S.C. § 4958 and the corresponding Treasury Regulations, 26 C.F.R. § 4958-1, et seq..
The term ‘disqualified persons’ refers to any person who is in a position to exercise substantial influence over the affairs of the nonprofit entity at any time in the five-year period preceding the date of the transaction. This includes, but is not limited to, voting and non-voting members of the governing body, presidents, chief executive officers, and chief financial officers.
Should an excess benefit transaction occur, it can result in the imposition of excise taxes on the disqualified person who benefited from the transaction, as well as the organization managers. The situation can become even more severe in cases where the excess benefit transaction is not corrected within the taxable period.
Such transactions and their consequences raise two key questions: What to do when an excess benefit transaction has occurred, and how to avoid such transactions. Understanding what constitutes an excess benefit transaction, who qualifies as a disqualified person, and the penalties associated with these transactions are central to managing these situations.
This Freeman Law Insights blog delves into this issue, providing an incisive overview of both enforcing provisions and preventing infractions in relation to excess benefit transactions. It serves as a reminder that for nonprofit organizations, a proactive approach to compliance with these legal regulations is the safest course of action.