The rebuttable presumption of reasonableness
When a nonprofit board sets executive compensation, board members can face personal excise-tax liability under IRC 4958 if the pay is excessive. The protection is the rebuttable presumption of reasonableness — and it has three requirements.
1. An authorized body free of conflicts
Compensation must be approved in advance by the board or a compensation committee whose members have no conflict of interest with respect to the arrangement.
2. Appropriate comparability data
Before deciding, the authorized body must obtain and rely on data on compensation paid by similarly situated organizations — comparable in mission, budget, and location. For organizations with under $1 million in annual gross receipts, the regulations permit relying on data from as few as five comparable organizations. This is what a PeerBasis report provides, drawn from IRS Form 990 filings and traceable to each source return.
3. Concurrent documentation
The body must adequately document the basis for its determination concurrently — in the board minutes, at the time of the decision. Form 990 Part VI, Line 15 asks every filer annually whether it followed such a process.
Establish the presumption for your board
PeerBasis builds the comparability data and the concurrent-documentation minutes language in minutes, from one EIN.
Build a comparability report →References: IRC 4958; 26 CFR 53.4958-6; IRS Form 990 Part VI, Line 15.