Volunteers are the life blood of many tax exempt organizations. To keep volunteers volunteering, it is important for an exempt organization to follow the proper tax rules or they could create very unpleasant tax surprises.
Reimbursing Volunteers the Right Way
If the organization reimburses volunteers for out-of-pocket expenses, it is important to use an accountable plan to do so. Otherwise, the reimbursement will be taxable compensation to the volunteer. Even worse, if the volunteer does not report the compensation on her tax return, there could be a 25% excise tax on the compensation if the volunteer is a disqualified person (discussed later).
Accountable plans are reimbursement plans that meet three requirements:
- Business Connection: the plan should pay reimbursements only for reasonable expenses incurred on behalf of the exempt organization that would be deductible as a business expense if the volunteer were an employee. These include lodging and meal expenses while away from home overnight, mileage, travel expenses, supplies, etc.
- Adequate Substantiation: the volunteer must substantiate the expenses being reimbursed within a reasonable time. Substantiation can include completing the exempt organization’s reimbursement form or submitting to the exempt organization a detailed written record indicating the expense amount, when and where incurred, and the relationship of the expense to the exempt organization’s activities.
- Excess Advances: Advances in excess of the substantiated expenses must be returned to the exempt organization. Any excess advance not returned is treated as taxable compensation to the volunteer.
25% Excise Tax on Disqualified Persons
Disqualified persons who receive an excess benefit from a Section 501(c)(3) or (c)(4) organization are subject to a 25% excise tax on the excess amount. Disqualified persons include voting directors, certain key officers, and other employees who have a substantial influence over the affairs of the organization.
An excess benefit is normally defined as the amount by which the economic benefit received by a disqualified person exceeds the value of the consideration given by the disqualified person. Normally, a reimbursement should not be an excess benefit. However, an economic benefit that should be treated as compensation, but is not is an automatic excess benefit transaction. Thus, if reimbursements not made under an accountable plan are not reported as income, they are subject to the 25% excise tax.
Providing Information So Volunteers Can Deduct Unreimbursed Expenses
On the flip side, if the organization does not reimburse the volunteer’s out-of-pocket expenses, it is important to provide volunteers with required documentation so that volunteers can deduct the out-of-pocket expenses as charitable contributions.
Out-of-pocket expenses are subject to the same substantiation rules that apply when contributing money. The volunteer must produce one of the following:
- a cancelled check
- a receipt showing the volunteer’s name, contribution date, and contribution amount
- when neither of the above two items is available, other reliable written records showing the previous data
In addition to meeting the above recordkeeping requirements, an unreimbursed expense of $250 or more must be supported by a written acknowledgment from the exempt organization.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
