Is your nonprofit properly accounting for its expense reimbursements?
According to recent federal data, approximately 1.56 million nonprofit organisations registered with the United States Internal Revenue Service (IRS) in 2015.
Registering as an official charity or nonprofit offers many tax perks, but your organisation must account for all of its expenses and revenue to enjoy them. This includes any reimbursements to volunteers or paid employees who cover any business-related expenses.
The best way to keep track of reimbursements is to implement a solid reimbursement policy for the entire organisation. Use the following guidelines to create a nonprofit reimbursement policy that is IRS-compliant for 2020.
Common expenses incurred by nonprofits
Before crafting a nonprofit reimbursement policy, let's review the expenses incurred by your organisation. Ordinary expenses related to the business of your nonprofit can include:
- Travel expenses
- Dining expenses
- Cost of hosting events
- Cost of rent for office space
- Utility expenses
How can nonprofits report their business expenses?
Nonprofits must report any expenses they incur on Form 990 issued by the IRS. The expenses that are directly related to running your organisation or fulfilling its mission are considered reasonable business-related expenditures.
Since many of the operational costs may be paid out-of-pocket by volunteers or employees, your nonprofit can issue non-taxable reimbursements. However, if the organisation can't submit the proper documentation for these reimbursements, the IRS has no proof that they should be exempt from federal or payroll taxes.
- Any money spent by your nonprofit without proper documentation is considered employee compensation.
- Similarly, if your organisation gains income that doesn't directly benefit your mission, it's classified as unrelated business income.
- Any expenses that are treated by the IRS as compensation are subject to federal business and employment taxes.
Furthermore, if your records show that the organisation gained more than one thousand dollars in unrelated business income, you must join more than 46 thousand other nonprofits in filing Form 990-T. This is a business income tax form for exempt organisations.
Creating a nonprofit reimbursement policy per IRS guidelines
- Reimbursements under an accountable plan, don't have to be reported under payroll taxes.
- For filing of reimbursement expenses under an accountable plan, they have to meet the following criteria as per IRS guidelines:
- The form should contain thorough documentation of all business expenses with invoices and receipts.
- Employees and volunteers must seek reimbursement for expenses within a reasonable period (120 days.)
- Employees and volunteers must return any unspent money within 60 days. This applies if your organization provides cash advances for employees.
Best practices for a nonprofit reimbursement policy
When you create a reimbursement policy for your nonprofit, make documentation a top priority. Excellent record-keeping will keep you out of trouble with the IRS.
First, give everyone in your organisation a standard nonprofit expense reimbursement form. The form should have the following questions:
- When was the payment made?
- How much was the cost?
- What was the nature of the expense?
- How did it relate to the organisation's mission and purpose?
- Who benefited from the expense?
Endorse timely submissions in your policy. Stipulate that all receipts, petty cash slips, and invoices related to each expense must be submitted as well. Additionally,
- State your reimbursement rates for each type of expense. Though you can reimburse one hundred percent of each payment, the best practice is to follow federal reimbursement rate guidelines.
- For instance, check the 2020 mileage reimbursement rate and implement it into your policy. Then, use a per diem calculator to figure out all other reimbursement rates.
- Make sure that everyone in the organization is aware of the reimbursement rates and policy standards.
- You can require that volunteers and employees get a percentage reimbursement as long as your rates follow federal guidelines.
Creating and following a nonprofit reimbursement policy doesn't have to be hard. Use an expense management software like Fyle to keep track of and report your organisation's expenses. Fyle makes it easy to follow up-to-date IRS guidelines and requirements and allows you to claim any exemption your nonprofit is entitled to. Schedule a demo today to learn how Fyle can help your nonprofit stay compliant at all times!