Many churches pay little attention to the concept of “reasonable compensation”.

Nonprofit organizations, of which churches make up by far the largest percentage, must serve public interests not private.  As a result, an individual should not receive assets from a nonprofit entity simply because they have a significant relationship with the charity.  If this happens, the private inurement might have occurred.  If the IRS finds that inurement has occurred, painful penalties, called “intermediate sanctions” may be assessed on the individual receiving the resources.  Penalties may also be assessed on the organization’s board for allowing this to happen.

One often overlooked aspect of private inurement is the concept of compensation.  Nonprofit organizations can only pay a reasonable compensation to its employees.  Like beauty, reasonable can be in the eye of the beholder.  So, what is reasonable compensation?

Fortunately, the IRS lays down some guidelines to help answer this question.  If a church:

            Requires an independent compensation committee to set salaries that,

            Based its decisions on comparative data of other similar churches and,

            Documents its decisions in writing,

a presumption of reasonableness is established.

Overlooked danger zone – The Pastor’s Discretionary Fund

Many churches, for privacy purposes, establish special funds in which the pastor has total control over to cover sensitive benevolence issues.  While it is understandable why some churches take this course there is one point that must be made.  If any of the funds can be, at the pastor’s sole discretion, be diverted to the pastor or his family, the entire amount could be considered income.  If your church has such a fund it would be a good idea to review the terms the church has established (if any) to administer the account.