How Does The IRS Define Reasonable Compensation For Non-profits?

In our last post we talked about what actions the IRS can take if they suspect a non-profit is offering excessive compensation to its officers and directors. But before we delve too deeply, we thought we'd take a step back to talk about how they define reasonable compensation.

Reasonable compensation is defined as the value that would ordinarily be paid for similar services by similar companies under similar circumstances.

Compensation is presumed reasonable unless proven otherwise, provided the non-profit follows a set of standard procedures, which is known as establishing a "rebuttable presumption of reasonableness." To establish the rebuttable presumption of reasonableness, the transaction must be approved by an authorized body of the non-profit, the authorized body must use appropriate data to determine if the benefit is comparable to those provided by like companies under like circumstances prior to making a decision, and the authorized body must document the basis for its decision. (For non-profits with gross receipts of less than $1 million dollars, the compensation for similar positions paid by three similar organizations is considered appropriate data.) Once the non-profit establishes this rebuttable presumption, it becomes the IRS's responsibility to prove that a transaction involved excess compensation.

And remember, Gross & Romanick can guide you through this process so that there's never any doubt that you've successfully established rebuttable presumption of reasonableness.

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