Excess Benefit Transaction

What Does Excess Benefit Transaction Mean?

An excess benefit transaction occurs when one party receives a financially valuable benefit from a tax-exempt organization. Such transactions are illegal and may result in penalties, including an excise tax on the individual involved and potentially revoking the organization’s tax-exempt status.

Insuranceopedia Explains Excess Benefit Transaction

Charitable organizations and non-profits are often exempt from paying taxes. The federal government grants this tax-exempt status to groups that contribute to society through altruistic efforts, such as raising donations and distributing funds to those in need or supporting underfunded institutions like public schools.

An excess benefit occurs when a party improperly benefits financially from this tax-exempt status. If a tax-exempt organization is found complicit in such a transaction, it risks losing its tax-exempt status. This is one reason why nonprofits need proper insurance for nonprofit organizations, since directors and officers liability coverage can help protect the organization and its board members from the financial fallout of regulatory violations. The cost of nonprofit insurance varies depending on the organization’s size, activities, and risk exposure.