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Types of Compensation Examined in Non-Profit Reasonable Compensation

Issues raised by exempt compensation: A. Inurement, B. private benefit, C. self-dealing, D. other factors of reasonableness. When evaluating an exempt's organizations employee's compensation and all forms of compensation paid must be included in its analysis. Below for the purpose of this conversation compensation includes at least the following: 1. salaries and wages, 2.Contribution to a pension and profit-sharing plan, 3. unpaid deferred compensation, 4. payment of personal expenses, 5. Rents royalties and fees, 6. Personal use of property and facilities. The gross income of a licensed commissioned and ordained minister does not include the fair rental value of a home, or a housing allowance paid, as a part of the minister's compensation for services performed that ordinarily the duties of the minister. A minister who was furnished a Parsonage may exclude from income the fair rental value of the Parsonage, including utilities, however, under these circumstances the amount excluded cannot be more than the reasonable pay for the minister services. If the minister owns the home, you may still claim deductions for mortgage interest and real property taxes period if your housing allowance exceeds the lesser of your reasonable salary, the fair rental value of the home, or your actual expenses, you must include the amount of the excess as other income. A minister who receives a housing allowance may exclude the following gross income to the extent it is used to pay expenses and providing a home. Generally, those expenses include rent, mortgage, utilities, repairs, and other expenses directly relating to providing a home the amount excluded cannot be more than the reasonable pay for the minister's services. ~Dr. Damien S. Fields, President & CEO, HME Consulting, Inc.

Rules and Compensation concerning IRC 83

In connection with Rules and Compensation Benefits concerning IRC 83 Many founders have had questions about Section 83(b) elections. They have often heard in startup circles that they need to file these but may not understand when it makes sense to do so or what problem the Section 83(b) election solves. So, what is a Section 83(b) election? It’s a letter you send to the Internal Revenue Service letting them know you’d like to be taxed on your equity, such as shares of restricted stock, on the date the equity was granted to you rather than on the date the equity vests. Put simply, it accelerates your ordinary income tax. Please note that Section 83(b) elections are applicable only for stock that is subject to vesting, since grants of fully vested stock will be taxed at the time of the grant. Example:1 In each of the below examples, assume you receive 100,000 shares subject to vesting, worth $.01 per share at the time of grant,$1.00per share at the time of vesting, and$5.00per share when sold more than one year later. We’ll also assume you are subject to the maximum ordinary income tax rate and long-term capital gains rate. Example 1–83(b) Election In this example you timely file a Section 83(b) election within 30 days of the restricted stock grant, when your shares are worth $1,000. You pay ordinary income tax of $370 (i.e., $1,000 x37%). Because you filed a Section 83(b) election, you do not have to pay tax when the stock vests, only on the sale. On the sale (which occurs more than one year after the date of grant)you recognize a taxable gain of $4.99 per share (not $5.00, because you get credit for the $.01per share you already took into income), and pay additional tax of $99,800 (i.e., $499,000 x20%). Your economic gain after tax? $399,830 (i.e., $500,000 minus $370 minus $99,800). Example 2–No 83(b) Election In this example you do not file a Section 83(b) election. So, you pay no tax at grant (because the shares are unvested) but instead recognize income of $100,000 when the shares vest and thus have ordinary income tax of $37,000. On the sale (which occurs more than one year after the date of vesting) you recognize a taxable gain of $4.00 per share (not $5.00, because you get credit for the $1.00 per share you already took into income), and pay additional tax of$80,000 (i.e., $400,000 x 20%). Your economic gain after tax? $383,000 (i.e., $500,000 minus$37,000 minus $80,000) ~Dr. Damien S. Fields President & CEO