Nonprofits: Paying Volunteer Expenses

02/21/2021
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Authored by: Tim Furbush

Nonprofit organizations rely heavily on volunteers.  When this happens, volunteers can incur significant transportation and other expenses in connection with the performance of their volunteer services. An expense payment may be paid to a volunteer, and the amount can be excluded from the volunteer’s taxable income, similar to a reimbursement for an employee of the organization. The taxation of expense payments is typically determined by the rules for accountable plans or working condition fringe benefits.

An “accountable plan” allows an employer to reimburse employees’ expenses on a tax-free basis if three requirements are met:

  1. There is a sufficient business connection. The reimbursement must be for a legitimate business purpose and cannot be for a personal expense.
  2. The expenses are properly substantiated within a reasonable period of time. The business connection should be appropriately documented and supported. This documentation should include the business purpose, time and place, and the amount.
  3. Excess reimbursements are promptly returned. Any amounts paid in excess of the business purpose should be returned within a reasonable period of time.

The IRS generally defines a reasonable period of time as events that occur in the following list:

  1. The expense is accounted for sufficiently within 60 days after being paid or incurred.
  2. Excess reimbursements are returned within 120 days after the expense is paid or incurred.
  3. Requests are made to employees periodically to obtain appropriate documentation, and the employee complies within 120 days of the request.

If the requirements for an accountable plan are not met, the plan is a non-accountable plan, and the reimbursements would be treated as taxable income.

The IRS has long taken the position that the accountable plan rules apply equally to volunteers if the employer has the right to direct and control how the volunteers perform their services. In other words, individuals providing services without pay under the employer’s direction and control are treated as employees under the accountable plan rules. So long as your volunteers qualify as employees and, your reimbursements meet the requirements of the accountable plan rules, the reimbursements will not be subject to federal tax.

The rules for a “working condition fringe benefit” are similar, allowing an employer to provide property or services to employees on a nontaxable basis so long as:

  1. The expenses would qualify for a business expense deduction if the employees paid for them,
     
  2. there is a sufficient business connection and,
  3. the business use is appropriately documented.

The business expense deduction (under Internal Revenue Code section 162) requires a profit motive, raising the question of whether volunteers can qualify for the deduction. IRS regulations answer that question by specifically stating that “bona fide volunteers” can use the working condition fringe benefit exclusion if the volunteers don’t have a profit motive. (This rule applies to volunteers for organizations such as yours that are exempt from tax under the tax code or for a governmental entity, as defined in the regulations).

For example, the regulations state that an individual is a bona fide volunteer if the total value of the benefits that the volunteer receives in connection with the volunteer’s services is substantially less than the total value of the services that the volunteer provides.

Volunteers that are considered independent contractors instead of employees, because they don’t satisfy the control test for the accountable plan rules, can receive benefits under the working condition fringe benefit rules. That’s because the federal tax exclusion under those rules (unlike the accountable plan rules) also applies to independent contractors.

For any questions related to volunteer expenses or nonprofit accounting in general, please contact Tim Furbush at tfurbush@vlcpa.com or 800.887.0437. 

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