Artisan Q&A: Expense Reimbursement and Non-Profits

Dear Rex,
I’ve formed an arts organization and serve as an officer.  The org has applied for tax exempt status.  I paid out of my own pocket both the filing fee to form the corporation and the application fee to file the Form 1023.  Assuming the IRS approves our tax exempt application, can the organization reimburse me for these costs without either of us getting in trouble?
—Nervous Newbie

Dear Nervous,

As I described in another recent Q&A, the IRS has very specific rules that prohibit transactions between an exempt organization and the people (called disqualified persons) who exert control over the operation of that organization.  The payment of compensation or the reimbursement of expenses by an exempt organization to a disqualified person constitutes one of these prohibited transactions.  [Internal Revenue Code 4941(d)(1)(D)]

However, volunteers of an exemption organization, including officers, may receive reimbursement or an allowance for out-of-pocket expenses, so long as such expenses are reasonable and necessary to carrying out the exempt purpose of the foundation and the payment is not excessive.  [Generally, IRS Guide and specifically, IRC 4941(d)(2)(E)]

The expenses you described—called organization costs—are only incurred during the organization’s formation.  Are they still eligible for reimbursement?  Yes.  The IRS recognizes organizational costs as legitimate business expenses.  Similar costs include:

  • State incorporation fees
  • The cost of legal services incident to the creation of the organization
  • Accounting fees for services incident to the creation of the organization
  • Filing fees

[IRS Publication 535]

So no need to be nervous about receiving reimbursement for the out-of-pocket expenses you incurred in creating your organization.