January 26, 2010

About Form 990 Schedule L: Excess Benefit Transactions

About Form 990 Schedule L:  Excess Benefit Transactions Tax Advisory Services

Form 990 Schedule L is required for all nonprofit organizations that answered questions 25, 26, 27, or 28 in Part IV of the Form 990 relating to transactions between various parties.

Transactions that are required to be reported on Schedule L include:

  • Excess benefit transactions
  • Loans to and/or from interested persons
  • Grants or assistance benefitting interested persons
  • Business transactions involving interested persons

The definition of interested persons is different for each one of these transactions.

Excess benefit transactions:

An excess benefit transaction is an excess payment to a disqualified person.  An excess payment means that the value of the benefit received from the organization is greater than the benefit given (including services) by a disqualified person.

The definition of a disqualified person for purposes of the excess benefit transaction begins with a five year look back period.  Anyone in a position to exercise substantial influence over the affairs of the organization in the last five years ending on the date of the transaction is a disqualified person.  It is not necessary for the person to actually exercise substantial influence, only that he be in a position to exercise substantial influence.  Certain individuals are automatically deemed to have the requisite substantial influence:

  • Voting members of the organization’s governing body (Board of Directors/Trustees)
  • Anyone who regardless of title is in charge of implementing the decisions of the governing body
  • Anyone who regardless of title is in charge of managing the organization’s finances

Others who are considered to have substantial influence unless the organization can prove otherwise include:

  • Family members of anyone listed above
  • Substantial contributors i.e., those who have contributed $5,000 or more or more than 2% of all contributions to the organization
  • A person who manages a discrete segment or activity that represents a substantial portion of the organization’s total activities, assets, income or expenses

To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the organization and all entities it controls are taken into account. Common examples of an excess benefit transaction include:

  • Payment of unreasonable compensation
  • Sale of property by the organization for less than fair market value
  • Sale of property to the organization for more than fair market value
  • Expense reimbursements under a nonaccountable plan not treated as compensation
  • Payment of personal expenses
  • Embezzlement

If none of these transactions has occurred or any other transaction where more value is given than received, there is no excess benefit transaction.

An excess benefit transaction can be alleged where there is no documentation regarding the method that the organization uses to determine compensation for its disqualified persons including the appropriate comparable data used in the determination.  If it is determined that the compensation exceeds the appropriate comparable compensation levels, an excess benefit transaction will be deemed to exist.
An excess benefit transaction may have serious implications for the disqualified person that entered into the transaction with the organization, any organization managers that knowingly approved of the transaction, and the organization itself.  The disqualified person is subject to an excise tax of 25% of the excess benefit received.  If the excess benefit transaction is not corrected, i.e., the excess benefit returned to the organization within the prescribed time, a penalty equal to 200% of the excess benefit is assessed.

In addition, if the excise tax is assessed against a disqualified person, then any organization manager who participated in the excess benefit transaction is subject to a tax of 10% of the excess benefit.  This tax will not be assessed if the manager can prove that their participation was not willful and is due to reasonable cause.  If more than one manager participates in a transaction, each of them is liable for the tax.

Transactions that can become excess benefit transactions should be carefully monitored by the organization for the benefit of all interested parties.  Procedures for maintaining relevant records can help alleviate any problems in this area.

For more information on Form 990, post a comment below or contact ourTax Planning & Preparation Group at 440-459-5700.

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