Can an employee of a non-profit donate back to the organization?

July 7, 2006 2:53 PM

Can board members of a non-profit business, who also act as the orginazition's primary salaried employees, donate a portion of their salary back to the non-profit, and if so, would it be tax deductible?

As more and more of our services begin to fall into the category of community benefit, we've begun to consider turning our for-profit theater into a non-profit entity. We would have the smallest board required by state law, three members, consisting of myself, my wife, and my sister (who also acts as our CPA).

My wife and I are our business's primary employees, working seven days a week and taking paychecks on a "needs-only" basis. The problem is that as a non-profit we'd need to specify a set salary for ourselves, which doesn't fit into the way we've been running our business.

So, let's say we allot $1,000 per week for our combined income, but only need $300 that week. I assume we can donate the additional $700 back to the organization, but would it be tax deductible? I wanted to arm myself with as many opinions as possible before approaching my sister with this scenario.

posted by bjork24 to work & money (7 answers total)

I know you're looking for a quick-and-easy answer, but my suggestion is that you involve a lawyer in this, especially since the business involves family.
posted by MeetMegan at 2:57 PM on July 7, 2006

I work at a church. I donate a portion (not 70%) back to the church and it is tax deductible. I know one of our employees donates his entire salary back.
Not sure if churches are in a different category than your non-profit.
posted by clh at 2:59 PM on July 7, 2006

In general, Board members often donate a lot of money to a nonprofit. But I don't know if they can also be salaried employees. I thought 501(c)3 organization rules required that there be a Board separate from the salaried employees, but I've never gone through the process so I might be wrong there.
posted by salvia at 3:15 PM on July 7, 2006

Donations by board members is not only accepted in the nonprofit world, it's generally a strong expectation to be the point of being essentially a prerequisite for board membership in many organizations. It's considered leadership by example; i.e. board members donating generously to help goose support for the org's fundraising drives.

Regarding tax-deductibility, your sister would be able to answer better than I.
posted by nakedcodemonkey at 4:38 PM on July 7, 2006

My understanding was the same as salvia's, and I know it's something that's controversial in the NFP organizations and agencies I work with and have contact with. I'd suggest contacting a lawyer that could lay out some scenarios and the potential consequences and the best way (if any) to avoid negative repercussions.

Do you know anyone with a corporate law background that you could take out to lunch and pick their brain? Alternately, consulting a lawyer for this would probably count as a business expense and it's probably not a bad idea to use a lawyer anyway to structure this to be most advantageous to you and the business.

An idea: what about setting up an associated NFP entity (a charity, probably, not a straight NFP) that you can donate money to that would be free and clear of the potentially contentious issue of directors of a NFP getting paid. Then the NFP entity could have more freedom to seek a large community based board and seek other funding for its community mandate, while maintaining a source of revenue from your donated paycheques. Just a thought - again, a lawyer could work these scenarios out with you.
posted by Cyrie at 4:48 PM on July 7, 2006

Another issue: excessive deductions on your part may subject you to the AMT.
posted by sardonista at 8:19 AM on July 8, 2006

The answer to your question is almost certainly yes. If you took a salary and gave a portion of it back -- keeping detailed receipts, of course -- I'm sure it would be deductible. Ditto for board members.

But can or should employees -- especially the only employees -- or their family members, be on the board of a nonprofit? If you want to be tax-deductible, I'm almost positive the answer is no. Regardless of legality (which I don't know, but suspect is a resounding "Don't!"), it will look bad and possibly arouse suspicion from donors and the feds that three family members are taking donations and paying them out to the very same people, giving others and themselves a tax deduction in the process.

I know you mean well and are doing this for the common good, so I'd hate to see you get in trouble for it, because the IRS doesn't really care that you had good intentions. See a lawyer and be prepared to heed his suggestions to make some changes in your concept.
posted by SuperNova at 12:41 PM on July 8, 2006