An excess benefit transaction is a transaction in which one party gains something financially valuable from a tax-exempt organization.
Excess benefit transactions are against the law and punishable by levying an excise tax on the wrongdoer as well as possibly stripping the organization of its tax-exempt status.
Charitable organizations and non-profits are often exempt from paying taxes. The federal government awards this tax exempt status to groups that help society through their altruistic endeavors, such as raising donations and distributing those funds to the less fortunate or underfunded institutions like public schools.
Excess benefit takes place when a party takes advantage of this tax-exempt status for undue financial gain. If the tax-exempt organization is found to be complicit in the excess benefit transaction, it can be stripped of this status.
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