Can private foundations reimburse expenses paid for with a personal check or credit card?
Yes, while it is advisable for foundation managers to cover operating expenses from the foundation's own bank account, there are provisions for reimbursing legitimate expenses incurred by foundation insiders and employees. In fact, if the foundation does not reimburse a valid expense, the person who paid it can consider it a charitable contribution to the foundation. However, it's important to note that such contributions should be properly documented and meet IRS requirements in order to be claimed as charitable deductions. This becomes especially crucial when the contributed amount exceeds the $250 reporting threshold, as tax-exempt organizations are required to send a formal acknowledgment letter for donations above this threshold
What qualifies as a legitimate expense for reimbursement? Any reasonable and necessary expense directly related to the foundation's charitable purpose is eligible for reimbursement. Common examples include office supplies, professional fees, and travel expenses.
The Importance of an Accountable Plan: An accountable plan is an essential accounting policy that adheres to specific IRS regulations for reimbursements. By following an accountable plan, reimbursements are not considered taxable income for the reimbursed individual. Moreover, neither the organization nor the individual needs to pay payroll taxes related to these reimbursements. They also remain valid deductions for the organization. However, if reimbursements do not meet the requirements of an accountable plan, they may be considered taxable wages, which is unfavorable for both parties.
Conditions for an Accountable Plan: For a reimbursement policy to qualify as an accountable plan, the following conditions must be met:
• All reimbursements must be for reasonable and necessary expenses directly related to the foundation's charitable mission.
• Reimbursable expenses must be substantiated within a reasonable timeframe, typically within 60 days, through receipts, invoices, or similar documentation.
• Any excess overpaid by the foundation must be returned to the organization within a reasonable period, often within 120 days.
• While accountable plans do not necessarily need to be in writing, it is highly recommended to formalize an expense reimbursement policy that clearly outlines the accountable plan requirements.
Prohibition of Personal Gain: Let's clarify two distinct financial transaction scenarios concerning private foundations. First, there's the situation where an individual opts to cover an expense on behalf of the foundation. In essence, this action can be seen as an informal lending of funds to the foundation, usually without any interest or the anticipation of a monetary return. Generally, this practice is considered acceptable and typically doesn't raise any concerns.
However, the opposite scenario warrants careful consideration. When the foundation disburses funds to cover personal expenses of its insiders, even if it takes the form of a short-term loan and is promptly repaid by the individuals involved, this is deemed as self-dealing. Self-dealing is a term that carries significant legal and ethical implications. It is unequivocally prohibited within the sphere of private foundations. The core issue revolves around the fundamental principle that private foundation assets should be exclusively devoted to advancing their charitable objectives. It is crucial to emphasize that reimbursements for personal expenses are strictly forbidden. Such practices risk breaching the self-dealing regime, which may result in severe financial penalties.
Conclusion: Reimbursements for legitimate expenses are common in private foundations but must always adhere to the guidelines of an accountable plan. Proper documentation, adherence to IRS regulations, and a clear reimbursement policy are essential for ensuring compliance and avoiding legal issues.
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