By John Kent, CPA
An exempt organization's (EO) payment (or reimbursement) of the travel expenses of a disqualified person (DP) can have adverse tax consequences if appropriate procedures are not followed. Specifically, the EO must determine whether a payment should be treated as reportable compensation to the DP.
DPs include voting directors, certain key officers, other employees, and certain family members of these that have substantial influence over the affairs of the organization.
A DP who receives an excess economic benefit from a Section 501(c)(3) public charity or 501(c)(4) organization is subject to a 25% tax on the excess amount. An organization manager who participated in the excess benefit transaction (EBT) may, under certain circumstances, be subject to a 10% tax. An organization manager is any officer, director, or trustee of the organization, or one who has similar powers or responsibilities.
An excess benefit is generally the amount by which the economic benefit received exceeds the value of consideration given by the DP. However, in three instances (deemed automatic EBTs) the entire amount paid to a DP is an excess benefit. One automatic EBT is unreported compensation.
An economic benefit that should be treated as compensation but is not is an automatic excess benefit. This is true even though total compensation would have been reasonable had the economic benefit been included in compensation. An economic benefit will be treated as consideration for services only if there is a clear indication of intent to do so. Therefore, an economic benefit intended to be compensation must be approved as such according to the organization's policies and properly reported in its books, records, and tax returns (e.g., reported as compensation to the recipient on Form W-2 or Form 1099).
An EO's payment (or reimbursement) for reasonable and necessary travel expenses incurred by a DP entirely for EO business is a tax-free working condition fringe benefit to the DP. Expenses include transportation costs, lodging, meals and incidental expenses in getting to and from a destination, as well as such expenses while at the destination. This rule applies to both domestic and foreign travel. However, when a DP combines personal travel with business travel, a portion of the related expenses generally must be treated as taxable compensation to avoid being an automatic excess benefit.
An EO may encourage DPs to take a spouse (or family member) on trips by paying the spouse's travel expenses. The trip may be intended as a vacation for the spouse (and a perk for the DP). If so, the spouse's expenses must be reported as compensation to the DP.
These are examples of issues that can complicate travel expense reimbursement and documentation. Please contact Keiter with any questions you have in relation to the tax considerations for travel expense payments.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.