Until recently, nonprofit organizations were not subject to specific limits on the amount they could spend on salaries, fundraising and other overhead expenses. However, overhead expenditures by nonprofits exempt from federal income tax may come under scrutiny by the Internal Revenue Service, and new legal restrictions on overhead spending are also being put in place by some state governments.
The Nondistribution Constraint
As Yale Law School Professor Henry Hansmann observes in "The Ownership of Enterprise," nonprofit organizations are subject to the nondistribution constraint, which is a legal prohibition on distributing net profits to insiders. For example, charities can be subject to financial penalties and even lose their federal tax exempt status, if they pay salaries that the IRS determines to be excessive.
New York's Limit on State Funding
As nonprofit lawyer Bruce Hopkins observes in "The Law of Fundraising," the U.S. Supreme Court has struck down several attempts to limit nonprofit fundraising expenditures. However, in 2012, Governor Andrew Cuomo of New York, placed specific limits on overhead expenses for nonprofits receiving state grant funding: total overhead expenditures cannot exceed 25 percent of state grant support to a nonprofit, with no more than $199,000 going to an executive's salary.
The Oregon Law
In recent years, several state legislatures have also tried to pass new restrictions on nonprofit overhead, and in 2013, the Oregon legislature enacted a specific limit on overhead expenditures. As of January 1, 2014, a charity that does not spend at least 30 percent of its expenditures on its charitable programs can be stripped of its eligibility to receive donations exempt from Oregon's state income tax.