allowable expenses for nonprofit organizations

How To Create a Reimbursement Policy for Your Nonprofit Organization’s Allowable Expenses

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Daniel

Just like for-profit businesses, nonprofit organizations often use a reimbursement policy to pay mission-related employee expenses. According to the Internal Revenue Service (IRS), if a nonprofit employee spends their own money on an expense specifically for the nonprofit, they are eligible for reimbursement. 

Sometimes, though, the reimbursement process can be complicated because each reimbursement-eligible expense must be meticulously reported according to a specific set of guidelines from the government. This guide will list the nonprofit expenses the federal government deems reimbursable, explain how a nonprofit can create an IRS-compliant reimbursement policy, and provide other tips and tricks for nonprofit tax filing.

Let’s go!

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What Is an Expense?

An expense is the cost of paying for something. While you might not automatically associate nonprofits with traditional spending, they still spend money like traditional businesses.

In fact, nonprofits incur numerous types of expenses from their employees, volunteers, and other stakeholders. Some common nonprofit costs include:

  • Travel: plane tickets, rental cars, and hotel accommodations if employees go to industry-related events

  • Event hosting: decorations, bartenders, and caterers if employees plan industry-related events

  • Resources: subscriptions, pens, and sticky notes for employees to do their jobs

Different nonprofits might have different expenses simply based on the nature of their work. If the above examples do not apply to your nonprofit, that is okay! This guide will still be useful. 

Pro Tip: Before crafting your nonprofit’s reimbursement policy, create a list of common employee purchases. That way, you can familiarize yourself with the typical amount they spend to make any future outlying figures more obvious. 

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Understanding IRS Expense Reporting Requirements

As part of the nonprofit tax code, you have to report your expenses and revenue on your taxes just like for-profit businesses and individual taxpayers.

allowable-expenses-for-nonprofit-organizations-understanding-reporting-requirementsMarie wants to make sure she thoroughly understands IRS reporting requirements.

Pro Tip: Let’s talk about the nonprofit tax ID — all nonprofits need an ID that tells the IRS exactly what kind of entity they are. If you do not have one, you cannot pay employees, file taxes, or open bank accounts.

In this section, let’s take a look at the different forms and expenditures your nonprofit likely encounters.

Form 990

The nonprofit tax form 990 is the tax return equivalent for charities. Nonprofits have to fill one out every year with all of the expenses that they incur. Those expenses fall into three categories. Let’s explore them one by one.

Non-Taxable Expenses

Similar to nonprofit write-offs, non-taxable expenses are fundraising costs, administrative expenses, and other charges that are necessary for tackling your nonprofit’s goals. You are responsible for documenting these costs correctly with receipts, stubs, bills, or invoices. Without proper documentation, the IRS has no proof that they are allowable deductions. The last thing you want is your lack of proof getting in the way of your nonprofit tax deductions

Employee Compensation

Employee compensation refers to the wages that your nonprofit pays to its employees. If an employee was supposed to get reimbursed for a mission-related expense but failed to document it correctly, this also counts as employee compensation.

Just as with any taxable income, employees have to pay taxes on their wages and record everything on their individual taxes. Typically, this tax comes out of an employee’s paycheck automatically.

Unrelated Business Income

Unrelated business income refers to income your nonprofit makes that is not related to your nonprofit’s mission. Nonprofits have to pay tax on this type of income. Examples of unrelated business income include:

  • Advertising: if a charity in a prime city location sells space on the side of its building for ads or other promotions

  • Storage: if a nonprofit rents out half of its brick-and-mortar location to another business that needs storage space

Form 990-T

Form 990-T is another IRS form for nonprofits. Many nonprofits will not need to worry about this form, as it only applies to those that make more than $1,000 in unrelated business income a year.

With a clear understanding of the above forms and expenses, your organization will be well on its way to defining the ins and outs of the relationship between the nonprofit sector and the IRS. If you work hard to keep accurate and thorough records, you should have no problem with your nonprofit tax returns

Pro Tip: Have you ever wondered if nonprofit tax returns are public record? The answer, in short, is yes. This can play to your advantage! If you are confused about any of the above tax filing requirements, conduct a nonprofit tax returns search or an IRS 501(c)(3) search to see what similar charitable organizations are doing. This might help paint a clearer picture of what the IRS expects from your nonprofit. 

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Creating an Accountable Plan

In this section, we outline exactly how to implement an accountable plan. An accountable plan is a set of guidelines that follows IRS regulations for reimbursing nonprofit tax code 501(c)(3) workers for business expenses.

Pro Tip: If you are not sure whether your nonprofit is classified as a 501(c)(3) or not, ask yourself one question: Did you receive a nonprofit letter of determination? If the answer is yes, you are likely a 501(c)(3).

Keep reading to learn what the IRS requires for an accountable plan.

Related Expenses

A related expense is exactly what it sounds like — anything that is related to your nonprofit’s mission. You must record these expenses as part of your organization’s accountable plan.

Proof

Record expenses alongside proof. Proof can be in the form of an invoice or receipt. 

Seeking Reimbursement

Should an employee seek reimbursement for an expense, they must submit that request no more than 60 days after incurring the expense. 

Returning Unspent Funds

If a nonprofit provides funds to an employee that goes unspent, the employee must return those funds within 120 days.

Pro Tip Consult your organization’s bookkeeper, financial advisor, or other data administrator when you are putting together the information for your accountable plan. Since this plan directly relates to the IRS, you will want a trained professional to take the reins on it. 

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Creating a Reimbursement Policy

Now that you know what the IRS requires, use that information as an outline for creating your administration’s reimbursement policy. In addition to the above IRS guidelines, consider our below tips. 

allowable-expenses-for-nonprofit-organizations-creating-a-policyOliver is almost ready to create his reimbursement policy!

Set Reimbursement Rates

Firstly, use federal and state per diem rates as a reference. A per diem rate is an allowance an organization gives to its employees. This allowance is in lieu of paying for the entirety of the actual expenses.

For example, instead of letting an employee charge you for every expense they have during a trip to an out-of-state conference, you can give them X amount of money for flights, X amount for lodging, X amount for meals, and X amount for transportation. Of course, your administration can always choose to reimburse 100% of your employees’ expenses if it fits your budget.

Define the Submission and Approval Process

Tell your employees how long they have to submit a request and how long it takes

for the request to get approved or denied. The length of time they have to submit a request must be shorter than or equal to the IRS’ number. Put these processes down in writing via a shared Google Doc or another form.

Create a Reimbursement Form

Every time an employee wants to submit an expense, have them fill out a form. The form should ask for background information on the expense, including the:

  • Amount

  • Date

  • Location

  • Reason

Require Documentation

Have a place on the form for the employee to attach a receipt or invoice as both a record of the expense and proof that the given information is accurate. This is not only a general accounting and bookkeeping best practice, it is also an IRS reimbursement requirement

Publicize the Policy

Once you finish creating your policy, make sure it is available to everyone at all times. Although it might seem like overkill, send the policy in an email, add it to a shared drive, and use other publication means to make it as accessible as possible. 

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Final Thoughts

And there you have it! We hope you feel confident in your ability to create a reimbursement policy for your nonprofit organization. 

While the above information is true for nearly every nonprofit in the United States, some exceptions or additional requirements may apply to you. For example, if you live in California, you have to fill out a California 199N. And if you hire freelancers or contractors, you need nonprofit W-9s. So do not just take us at our word! Pay attention to any variations or conditions that relate to your nonprofit.

Enjoyed the article? Download it to keep or share with others!

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FAQ

💡Can a nonprofit write off expenses?

Yes! The expenses must be related to the nonprofit’s mission, though. Find out more. 

🔑 What expenses can a nonprofit deduct?

A nonprofit can deduct non-taxable expenses, which are expenses that relate to the nonprofit’s mission. Find out more. 

📝 What is an accountable plan?

An accountable plan is a set of guidelines that follows the IRS’ regulations for reimbursing workers for mission-related expenses when those expenses are not counted as income. Find out more.

 

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Daniel
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