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Performance-Based Employee Bonuses

Can this type of bonus jeopardize an organization's tax-exempt status?

Private Letter Ruling 9112006

Does a tax-exempt organization jeopardize its exempt status by paying employees a "bonus" that is based on performance?

That was the issue addressed by the IRS in a recent ruling. Churches and other organizations exempt from federal income taxes under section 501(c)(3) of the Internal Revenue Code may not pay "unreasonable compensation" to their workers. If they do, they risk losing their tax-exempt status.

The "PTL" organization lost its tax-exempt status retroactively to 1984 on the basis of unreasonable compensation paid to three of its top employees. What about employer bonuses that reward employees for outstanding achievement? Do they jeopardize an exempt organization's tax-exempt status?

The case before the IRS involved a nonprofit hospital that proposed to pay bonuses to its employees. The hospital created a "funding ...

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  • July 1, 1991

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