Excessive benefits and private Inurement (unintentional or intentional) could potentially harm your pastor and even your church!
With my increased one-on-one interaction with more churches and nonprofit organizations through my bookkeeping business,
I have become increasingly alarmed regarding how some churches are “blessing” their pastors. Don’t misunderstand me! No one deserves to be blessed more than our pastors. They give their lives to watching over our souls and many with 24-hour workdays and making less than minimum wage. BUT there is a right way to bless our ministers and there is a very WRONG way to do it too! See more below.
I have also seen some nonprofit founders innocently put their orginizations in danger of losing their tax exemption by doing things they do not know could be interpreted as excessive benefits or private inurement.
Unintentional excessive benefits and private inurement can occur as some churches or nonprofits try to make up for the low pay by doing other things for them, such as paying for their Pastor's gas with the church’s debit or credit card or paying their founder's utilities. Let me stop here and add that if set up and addressed properly, a church can bless their ministers with "extras" such as helping them with housing expense, but if not handled correctly...those "blessings" can end up being a very costly mistake.
Section 501 (c) (3) is a portion of the Internal Revenue tax code that give certain organizations the right to receive tax-deductible contributions.
One of the main requirements to qualify for that tax-exempt status is that the net earnings of that nonprofit organization may not “inure” to the benefit of any private individual or shareholder.
Simply stated that means no one can personally benefit economically (other than reasonable compensation for services rendered) from a tax-exempt organization.
The IRS term for that benefit is “Private Inurement”. Inurement happens when a transaction or exchange occurs, and an insider receives economic gain through the use of funds or assets of that organization. An insider is an individual with a personal interest in the church or nonprofit such as:
As I mentioned earlier in this article, many small churches cannot pay their pastors what they would like to. To make up for this, they often try to help them in other ways. That is commendable … if done legally such as an accountable reimbursement plan or a housing allowance. The problem lies in that many do not understand or even know what they can and cannot do "legally" in terms of "blessing" their pastor.
Be aware that even small amounts can be considered a violation of the excessive benefits and private inurement clause found in Section 4958 of the Internal Revenue Code regulations. Such a violation can have drastic outcomes! Your church or nonprofit could potentially lose its tax-exempt status which could also negatively affect your donors!
Another devastating result of private inurement is the IRS can impose immediate sanctions if the private benefit involves a disqualified person, such as a corporate officer, pastor, deacon, founder, etc. Those sanctions can include a tax penalty of 225% of the private benefit received. The deacons or board members that authorized the benefit can also be penalized.
I mentioned at the beginning of this article that some churches give their pastor the church's debit or credit card for fuel and meals and do not require any documentation or report those transactions as taxable income.
Without documentation AND a qualified accountable reimbursement policy in place - these transactions can be considered private inurement.
To avoid that possibility, set up an accountable reimbursement policy and follow the strict guidelines for that plan.
Paying the pastor's utility bills or other personal expenses and not including those amounts in his gross wages is private inurement. See this article on Pastor Sentenced to 37 Months for Church and Ministry Commingling. A better way to bless your pastor is to set up an appropriate housing allowance. In some instances you can designate your pastor's entire compensation as a housing allowance.
Another example of private inurement could be paying a pastor a percentage of the general fund offerings and not setting a cap on the amount. See this page on minister’s compensation.
Note: I used the term "church" in the points below...but some of the following examples are applicable to nonprofit organizations as well.
The list could go on and on, but do you see my point? Just use common sense. If anyone in any way related to your nonprofit organization or church, personally benefits from your organization (other than compensation for services rendered), it could potentially be considered private inurement. Private inurement could potentially jeopardize your organization's tax-exempt status and financially devastate the person receiving the personal benefit.
Last point: Every church and nonprofit organization should have a Conflict of Interest policy that clearly outlines what constitutes a conflict of interest. Some states such as New York require nonprofit organizations to have such a policy and even provide guidelines on what must be included in that policy.