Guide to intermediate sanctions for not-for-profit executive compensation

Grant Thornton Tax Guide Intermediate SanctionsRewarding the executives in your not-for-profit organization is best done after taking the pulse of the market to gauge the going rate. Capturing a realistic comparison of salary and benefits behooves your organization in hiring and retaining, and in meeting IRS rules about reasonable compensation.

Compensation shown to be excessive is subject to intermediate sanctions, a personal excise tax paid by “disqualified persons” — executives such as CEOs, COOs and CFOs — who provide services to a tax-exempt organization and receive unreasonable compensation. A personal excise tax is also paid by the individuals, such as board members, who participated in the decision to pay the compensation. As you might expect, personal excise taxes can be significant.

According to the intermediate sanctions regulations, reasonable compensation is the “amount that would ordinarily be paid for like services by like enterprises (whether taxable or tax-exempt) under like circumstances.” Any overage is considered unreasonable and treated as an “excess benefit.”

The rules are complex; Grant Thornton LLP’s guide helps you understand them. The guide defines intermediate sanctions, disqualified persons, organization managers and automatic excess benefits. It tells you about the potential of managing the risk of intermediate sanctions by establishing a rebuttable presumption that compensation is reasonable and obtaining an opinion letter about the reasonableness.

The guide shows you how to:
  • Identify individuals who are subject to intermediate sanctions
  • Determine whether compensation paid to disqualified persons is reasonable
  • Manage the risk of intermediate sanctions
  • Decide whether to undertake an intermediate sanctions study
  • Follow the steps in an intermediate sanctions study

Worksheets spell out the information to collect as a basis for your understanding and action.

Download the PDF of the complete guide.