Introduction
Tax-exempt organizations, particularly 501(c)(3) public charities and private foundations, must follow strict regulations to prevent self-dealing and excess benefit transactions. One key concept in these rules is the designation of disqualified persons – individuals or entities that have significant influence over the organization and are subject to special restrictions.
Who Is a Disqualified Person?
A disqualified person is someone with a close relationship to the tax-exempt organization who could potentially benefit improperly from its funds or operations. The IRS defines disqualified persons as:
- Officers, Directors, and Trustees – Individuals with decision-making authority over the organization.
- Key Employees – Those with substantial influence over the organization’s finances or policies.
- Substantial Contributors – Individuals or entities that contributed significantly to the organization (typically over $5,000 or 2% of total contributions in a year).
- Family Members – Spouses, ancestors, children, grandchildren, parents, grandparents and their spouses of any disqualified person.
- Related Businesses or Entities – Corporations, partnerships, trusts, or estates where a disqualified person owns more than 35% of the voting power or profits (20% in Private Foundations and Private Operating Foundations).
Why Does It Matter?
Disqualified persons are prohibited from engaging in certain financial transactions with the tax-exempt entity. Violations include:
- Excess Benefit Transactions – Paying unreasonable compensation or giving preferential treatment to disqualified persons.
- Self-Dealing (for Private Foundations) – Transactions such as compensation, leasing property, lending money, or selling assets between a disqualified person and the foundation.
If an excess benefit transaction occurs, the IRS imposes excise taxes on the disqualified person and may revoke the organization’s tax-exempt status if violations persist.
Comments (0)