Can private foundations reimburse expenses paid for with a personal check or credit card?

Yes, although foundation managers should always endeavor to pay all operating expenses out of the foundation’s own bank account, it is permissible to reimburse foundation insiders and employees if an expense accidently makes it onto someone’s personal credit card. In fact, if the foundation does not reimburse a legitimate foundation expense, then the amount paid should be considered a charitable contribution to the foundation by the person who paid it. 

Any reasonable and necessary expense to further the foundation’s charitable purpose is eligible for reimbursement. Because any reasonable and necessary expense is allowable, the list of potential reimbursable expenses is practically endless, but common examples include office supplies, professional fees, and travel expenses. However, it is very wise to ensure that all reimbursements are made within the bounds of an “accountable plan.” 

What is an accountable plan?

An accountable plan is an accounting policy that follows specific IRS regulations for reimbursements. By establishing and following an accountable plan, expense reimbursements are not included in the taxable income of the person who is reimbursed (the reimbursee). Furthermore, neither the organization nor the reimbursee are required to pay any payroll taxes relating to the reimbursements. Lastly, the reimbursements do not need to be separately reported to the IRS and they still count as a valid deduction for the organization.

If an organization makes reimbursements that do not respect the requirements of the accountable plan rules, then the reimbursements are considered taxable wages—a bad result for both the reimbursee and the organization.

In order for a reimbursement policy to qualify as an accountable plan, the following conditions must be satisfied:

  • All reimbursements must be for legitimate expenses. For foundations this means that reimbursements can be made only for expenses that were incurred in order to carry out the foundation’s charitable mission.
  • The reimbursable expense must be substantiated within a reasonable time period such as 60 days. It is possible to substantiate an expense by providing a receipt, invoice, or similar documentation to the foundation. 
  • If it turns out that the foundation somehow overpays the reimbursee over and above the actual expense, then the extra amount must be returned to the organization within a reasonable period of time (such as within 120 days of the receipt of the excess amount).  

Although accountable plans do not need to be in writing, it is a good idea to formally create an expense reimbursement policy that contains the accountable plan requirements. The most important requirement is that the expenses being reimbursed ultimately relate to the foundation’s charitable mission—any reimbursement of expenses for personal gain is strictly forbidden and risks breaching the self-dealing regime, which can result in severe financial penalties.

The bottom line is clear—reimbursements for legitimate expenses are completely normal but they should only be made within the bounds of an accountable plan.

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