Nonprofits are eligible to apply for 501(c)(3) tax exemption if their purpose is to become a charitable, religious, scientific or educational organization. After gaining the 501(c)(3) status, organizations redeem various benefits to help their cause. We at NonprofitLegalCenter.com will help your organization become 501(c)(3) tax deductible!
Deloitte Services LP has released their 2013 Deloitte Volunteer IMPACT Survey, detailing the impact of volunteering as it pertains to professional experience. The data shows that 81% of Human Resources Executives desire college graduates that have volunteered for nonprofits. Furthermore, 78% of the surveyed executives prefer veterans with volunteering experience. The overall research hypothesis is…
On August 21 from 2:00PM-3:00PM EDT, the IRS Exempt Organizations will be holding a phone forum discussing 501(c)(7) Social and Recreational Organizations. These organizations are defined as being organized for pleasure, recreation and other nonprofitable purposes. Examples include fraternities, country clubs, hobby clubs and sports clubs. The central purpose of these organizations is to provide…
Your 501(c)(4) organization might be eligible for expedited processing of you application, according to an IRS update. To qualify, your organization must meet all of the following criteria:
- Your organization applied for exemption as a 501(c)(4) organization.
- Your application had been pending for more than 120 days as of May 28, 2013.
- Your case involves possible political campaign intervention or issue advocacy.
If this information pertains to your organization, you may receive a Letter 5228, which is an Application Notification of Expedited 501(c)(4) Option. In order to self-certify your organization with a Letter 5228, your organization must devote “60% or more of both spending and time to activities that promote social welfare as defined by Section 501(c)(4)” and devote less than 40% of your efforts to political campaign intervention. Also, your organization needs to ensure that these thresholds apply for past, current and future activities. Follow the instructions listed in Letter 5228 to self-certify your organization and sign and return pages 4-5 within 45 days of the date of the letter.
For more information about Letter 5228 including how to make sure you meet the eligibility criteria in order to receive the letter, visit this page provided by the IRS.
This August and September, the IRS will be hosting various forums and workshops across the country to offer nonprofits education, training and the ability to network.
The IRSNationwide Tax Forums will feature a “full agenda of the latest tax law information, hands-on workshops, networking opportunities and exhibits of the latest products and services for your business needs.” These forums will be held at the Hyatt Regency in New Orleans (August 13-15), the Atlanta Marriott Marquis (August 20-22), the Gaylord National Resort and Convention Center in Washington D.C. (August 27-29) and the San Diego, California’s Town and Country Resort (September 17-19). Continuing Professional Education credits will be eligible attending for agents, accountants and CTEC participants. Visit the IRSNationwide Tax Forum website to register online.
The IRS will also be holding Phone Forums for those who cannot attend the Tax Forums in person. There is limited space so click here to register today. These forums will cover various topics. On August 21, 501(c)(7) social clubs will be discussed. On September 10, the topic will be Exempt Organizations and Employment Taxes. Lastly, on the 18th of September the subject will be “Stay Exempt: A Guide for Charitable Organizations with Changing Leadership.”
Workshops for small to medium sized 501(c)(3) nonprofits will also be available this summer. These workshops will are held by experienced specialists and will “explain the nuts and bolts of what 501(c)(3) entities must do to keep their tax-exempt status and comply with tax obligations.” There will be two workshops in Kentucky, with Highland Heights on August 13 and Lexington on August 15. Northern Californians can attend workshops on the 20th and 21st of August in San Francisco, while Southern Californian nonprofits will have an opportunity to get help in Anaheim from August 28-29. Finally, on September 9, a workshop will be held in St. Paul and there will be one in Minneapolis on the next day. For more information on the event and how to register, visit this link.
Our wonderful client Kick4Life will be participating in the iconic ING New York City Marathon on Sunday November 3rd, 2013. If you are in the New York area, we encourage you to sign up to run with Kick4Life and help them with thier mission of changing the lives of vulnerable children in Africa.
Kick4Life harnesses “the power of sport to transform the lives of some of the most disadvantaged young people in the world.” The organization is based at the Football for Hope Centre in Lesotho, a country in southern Africa. Kick4Life supports at risk youth through health education, HIV prevention and voluntary testing facilities, life-skills development, mentorship as well as physical activities like sports.
If you are interested in participating in the marathon to support Kick4Life, please email email@example.com. Spots are limited and are going fast.
Below is a video from Kick4Life about their texting service, which provides Lesotho residents with information and guidelines about how to avoid HIV and where their nearest HIV clinic is in Lesotho.
The 2013 Millennial Impact Report details the ways 18-30 year olds, known as the Millennial generation, approach social change and the nonprofit landscape. The study surveyed young people over the past three years with a total of 11,675 participants. This generation has been regarded by many as entitled, lazy and selfish. However, the reports states that “73% of Millennials volunteered for a nonprofit in 2012. Their motivations: More than three quarters were passionate about the cause or issue, while 67% felt they could make an impact for a cause they cared about.” This is good news for nonprofits who want to encourage activism to the youth, but what are the best ways to make your nonprofit engage with millennials? The report breaks this down into three key points: Connect, Involve & Give.
Millennials are constantly using social media and new technology to connect with each other, and your nonprofit must understand not only how the youth Connect but also why. “Millennials prefer to share information about the cause, not the organization itself.” This means that rather than boosting your brand and trying to drive traffic to a central source (your organization), you should join the larger conversation of the cause your trying to help. Organizations should connect with likeminded organizations via social media and participate in hashtags and trends to inform users about their stance on activism. The central tenant of social media is spreadability over stickiness, that is to create shareable content that promotes conversation rather than direct messages that only points users to your page. The study also urges organizations to think mobile. “Organizations should think “mobile first” and focus on responsive design as well as content, including navigation, context around the organization’s work, and success stories.” Hone your messaging by asking yourself these questions when crafting a post:
• How can you educate the Millennial audience about the broader cause?
• How does your organization uniquely contribute to that greater issue?
• How can your programs and design entice your audience to read more?
Think in terms of people thumbing through their phones. When using Facebook, it is better to accompany a statement with an image as it takes up more screen real-estate when users are scrolling in their news feed. Your goal is to develop inherently sharable content.
The next point is to Involve. Millennials are interest in nonprofits because they want to “support a cause, help other people, and become part of a community that’s equally excited and eager to make a difference.” Just like millennial’s use of social media, engagement is about building a boundless community based on a specific conversation. Next to working for a cause that they are passionate about, the second chief motivation for millennials to volunteer is “meeting new people who care about the same cause or issue.” Therefore, your nonprofit should develop ways to introducing young people who share the same activist spirit. Plan local events that engage activism or promote gathering or rallies that relate to your mission. Of the surveyed individuals, the biggest annoyance towards nonprofit work was “not having much to do while volunteering and having their time wasted (69%), plus not knowing exactly what they’ll be doing when they volunteer (60%).” Make sure your events are clearly detailed online, so that your organization does not have to waste useful time training or instruction participants as “47% deplored having to ‘attend long training sessions in person for things that could be explained virtually.'” Also, Millennials would rather be promised future engagement with a cause rather than prizes for their work. Keep in mind that “Millennials do not necessarily need ‘stuff’ as incentives; they prefer professional development opportunities and networking more than t-shirts and swag.”
Lastly, the report urges organizations to know how Millennials Give. The good news is that the Millennial generation is passionate about contributing what they can monetarily to causes they truly believe in (“close to 83% of respondents made a financial gift to an organization in 2012”). Yet, with the financial landscape as it is today, it will take some time until the youth has the capital to give large gifts. However, it is important to provide the donation option that Millennials prefer: via the web. An overwhelming majority of surveyed individuals (84%) “gave or wants to give via website, while giving in person came in a distant second at 48%.” Consider embedding a payment gateway on your site and make sure to signup for a Paypal account for your nonprofit. Although the fact remains that Millennials are not able to give large amounts yet, “52% of respondents said they’d be interested in monthly giving,” so nonprofits should provide a billing plan option. All in all, your online presence should exude a transparent and trustworthy organization to invite young donors.
We hope you read though this report and find ways to bring younger eyes to your cause. In the end, you want Millennial engagement to be ingrained of your organization’s culture.
Whether you are an individual planning to donate money to a 501c3 Nonprofit or an existing Nonprofit accepting donations, it is important to understand the restrictions and limitations of contributions; so as to make the most out of one’s 501c3 Tax Exempt Status.
Contributions You Cannot Deduct
There are some contributions you cannot deduct. There are others you can deduct only part of.
You cannot deduct as a charitable contribution:
1. A contribution to a specific individual,
2. A contribution to a nonqualified organization,
3. The part of a contribution from which you receive or expect to receive a benefit,
4. The value of your time or services,
5. Your personal expenses,
6. A qualified charitable distribution from an individual retirement arrangement (IRA),
7. Appraisal fees,
8. Certain contributions to donor advised funds, or
9. Certain contributions of partial interests in property.
Detailed discussions of these items follow.
Contributions to Individuals
You cannot deduct contributions to specific individuals, including the following.
- Contributions to fraternal societies made for the purpose of paying medical or burial expenses of deceased members.
- Contributions to individuals who are needy or worthy. This includes contributions to a qualified organization if you indicate that your contribution is for a specific person. But you can deduct a contribution that you give to a qualified organization that in turn helps needy or worthy individuals if you do not indicate that your contribution is for a specific person.
Example. You can deduct contributions for flood relief, hurricane relief, or other disaster relief to a qualified organization. However, you cannot deduct contributions earmarked for relief of a particular individual or family.
- Payments to a member of the clergy that can be spent as he or she wishes, such as for personal expenses.
- Expenses you paid for another person who provided services to a qualified organization.
Example. Your son does missionary work. You pay his expenses. You cannot claim a deduction for your son’s unreimbursed expenses related to his contribution of services.
- Payments to a hospital that are for a specific patient’s care or for services for a specific patient. You cannot deduct these payments even if the hospital is operated by a city, state, or other qualified organization.
1. What is a private foundation, or family foundation? Technically, it is a not-for-profit entity that can be controlled by a person, family or business. Sometimes private foundations are referred to as ‘family foundations’. They are organized exclusively for charitable, educational, religious, scientific and literary purposes under Section 501(c)(3) of the IRS Code. The foundation must be officially recognized by the IRS in order for contributions to it to be tax deductible. In practice, a private foundation is a unique planned giving vehicle that fosters family involvement, provides significant control over assets and giving, and allows donors to receive an immediate tax deduction for charitable donations that are made in the future.
2. What are the benefits of a private foundation?
- Family legacy. A private foundation establishes a legacy of giving that can carry the family name, supports causes that are important to you, and promotes charitable activities into the future.
- Control. Private foundations provide the greatest control of any planned giving vehicle. You decide which charities to support and how the assets are invested. You also have great latitude as to the types of assets you can donate to the foundation.
- Family involvement. A private foundation enables you to involve the family in philanthropy and pass values on to future generations.
- Current tax deduction for future grants. You can take an immediate tax deduction for contributed assets, even if the foundation does not make charitable grants until a later date. You are also able to remove taxable assets from your estate, without incurring capital gains taxes. (Consult with your tax advisor.
3. How does a private foundation compare to a Donor Advised Fund? The difference is mainly in control and flexibility. With a private foundation, the donor retains control over charitable donations and other disbursements. Foundations can hire staff, reimburse expenses, set up structured giving programs such as scholarships, and make grants directly to individuals in need. In addition, donors can contribute a much wider variety of assets to fund the foundation, such as “144” restricted stock, and the founder retains control over how the assets are invested. Contributors to a donor advised fund make irrevocable contributions to a nonprofit organization that administers the fund and makes decisions regarding fund investments. Contributors may recommend eligible charities as recipients for grants, but the fund’s governing body is free to accept or reject any recommendation.
4. What is the difference between a private foundation and a public charity?
The Foundation Center defines a private foundation as a nongovernmental, nonprofit organization having a principal fund managed by its own trustees or directors. Private foundations maintain or aid charitable, educational, religious, or other activities serving the public good, primarily through the making of grants to other nonprofit organizations.
To understand what a private foundation is, it helps to understand what it is not. Every U.S. and foreign charity that qualifies under Section 501(c)(3) of the Internal Revenue Service Code as tax-exempt is a “private foundation” unless it demonstrates to the IRS that it falls into another category. Broadly speaking, organizations that are not private foundations are public charities as described in Section 509(a) of the Internal Revenue Service Code.
Another difference between private foundations and public charities is that public charities generally derive their funding or support primarily from the general public, receiving grants from individuals, government, and private foundations. Although some public charities engage in grantmaking activities (see information and resources below on grantmaking public charities), most conduct direct service or other tax-exempt activities. A private foundation, on the other hand, usually derives its principal fund from a single source, such as an individual, family, or corporation, and more often than not is a grantmaker. A private foundation does not solicit funds from the public.
Not every organization that uses the word “foundation” in its name is a private foundation, and the word “foundation” has no legal meaning in and of itself. Instead you must look at how the IRS designates an organization and inquire as to whether they file a Form 990-PF (the tax return filed by private foundations) or a Form 990 (the tax return filed by public charities and other nonprofit organizations).
5. How may foundation assets be used? Donations to a private foundation may only be used for charitable purposes and certain administrative expenses.
6. Can I or members of my family be employed by my foundation? Yes. By appointing children or other family members as officers or directors, you will have the option of making the foundation a family affair. However, paying yourself or family members requires strict adherence to detailed IRS rules. To avoid the potential for legal problems, you must consult with your attorney before paying yourself or family members.
7. Can my family or I engage in transactions with the foundation? The IRS strictly prohibits self dealing. Disqualified individuals (the donor, lineal descendants and antecedents, e.g., parents, children and their spouses, and people under their employment) may not engage in transactions with the foundation except to make donations to it, or under limited circumstances, to receive fair market value compensation for services. Examples of self dealing include:
* Purchasing items from or selling items to the foundation.
* Personal use of foundation assets or income.
* Borrowing money from the foundation.
* Retaining foundation assets (e.g., paintings) on private premises.
8. Who can a private foundation give money (make grants) to? Private foundations typically carry out their philanthropy by making grants to recognized public charities. This includes churches and synagogues, educational, scientific and cultural institutions, poverty relief agencies or any other organization that qualifies as a 501(c)(3) charity according to the IRS. In some instances, a private foundation may provide grant money to individuals in the form of scholarships or grants for a particular project such as a art grant.
Private foundations are generally precluded from making grants to political campaigns or organizations that exist to influence legislation and voting.
9. Is there a minimum or maximum amount a private foundation must give away each year? The IRS requires that private foundations pay out at least 5% of the previous year’s average net assets for charitable purposes. This can include certain administrative expenses. There is no maximum limit on giving.
10. What types of organizations can a private foundation make grants to? Private foundations can give to any organization recognized by the Internal Revenue Service as a public charity. This includes churches and synagogues, educational, scientific and cultural institutions, poverty relief agencies or any other organization that qualifies as a 501(c)(3) charity according to the IRS.
11. How does a nonprofit supporting organization, compare to a private foundation?
A supporting organization is actually a private foundation as well, but it is treated, for tax purposes, as a public charity. This is because, under the tax law, it is so closely connected to at least one public charity that it is almost a part of that organization. The connection can be achieved by having a majority of the Foundation’s board appointed by the public charity. Or, the purpose of the Foundation can be to support specific projects of the public charity, in such amounts that the government can be reasonably assured that the public charity will be supervising the activities of the Foundation. The special tax status is granted because Congress is comfortable that the public will be protected, through the oversight and control by a public charity. Be careful, here, however, because the IRS has increasingly scrutinized both the applications of new supporting organizations, and their operations, just to be sure that there is such active oversight and control.
12. What are the penalties for failing to make the 5% payout within the designated time period?
Failure to make the 5% minimum payout results in a penalty equal to 15 percent of the remaining amount of the total payout that was not distributed as required. Remember, though, that this 5% payout requirement does not require payment during the first year of the foundation’s operation; while establishing yourself, you can defer grants into the second year – but not beyond (except under special set-aside rules).
13. Is it legal to compensate the trustees/board members of a charitable foundation?
Yes. Although the charity cannot exist for the significant benefit of a private individual, board service does involve devotion of time and expertise, for which individuals may be reasonably compensated.
The issue of “reasonable” compensation is a critical consideration. What comprises reasonable payments? The best guideline may be what other foundations in your area, with similar assets, do or do not pay their officers. This information is publicly available, as is federally mandated.
14. What is self-dealing and why is it illegal?
Self-dealing involves a direct or indirect transaction (generally a financial transaction) between the foundation and a “disqualified person” – even if the transaction would benefit the foundation. Self-dealing also includes any use of foundation income or assets by a private foundation for the benefit of a “disqualified person.” The self-dealing rules are outlined in Internal Revenue Code Section 4941 and were created to prevent misuse of foundation funds and assets for the personal gain of officers/directors and their friends or family.
Disqualified persons include, among others:
- Foundation trustees, directors, managers, or officers;
- Substantial contributors to the foundation;
- An owner of more than 20% of any business that is a substantial contributor;
- Members of the family of any of the above, including spouses, children, grandchildren, great- grandchildren, parents, other ancestors, or spouses of children, grandchildren or great-grandchildren;
- Any corporation in which more than 35% of the voting power is owned by disqualified persons; and
- Certain government officials.
Prohibited transactions include:
- The sale, exchange or leasing of property (e.g. purchasing office supplies, printing or insurance from a disqualified person);
- The lending of money or extensions of credit;
- The furnishing of goods, services or facilities for money;
- The transfer of, or use of the income or assets of a foundation for the benefit of a disqualified person; and
- The payment of money or property to a government official.
Questions to consider if you want to start your own foundation:
1) What state will be the foundation’s base?
Foundations are organized under state law and are generally established in the state where the foundation intends to do business. Unless laws vary drastically from IRS regulations in your state, generally, there is no need to state-shop when setting up a foundation. If the foundation is incorporated in one state but has a primary office in another state, the law requires that you file annually in both states.
2) What type of foundation?
- Private/Independent/Family Foundation: The IRS classifies an organization as a private foundation rather than a public charity when its funding comes from limited sources – an individual, a family, a corporation, or a small group of donors – rather than major support from the general public. The terms private and independent are often used interchangeably with the term family foundation. Family foundations are usually organized in the form of a nonprofit corporation or a trust and the bulk of the budget is usually made up of grants to other charitable organizations.
Private foundations have more autonomy and flexibility that other types of foundations. For example, directors are not subject to constant review by the organization’s members and are not responsible to shareholders. Private foundations are governed by different legal regulations than public charities and are required to pay a tax on investment income and make charitable expenditures that equal or exceed 5 percent of their endowment.
- Company/Corporate Foundation: This model is subject to the same rules as a private foundation but the source of funds is a for-profit company. It usually has a small endowment allowing for a reserve during low-profit years, funds pass through the foundation, and grants made generally come from charitable contributions of the for-profit company in the same year.
- Pass-Through or Conduit Foundation: A private, nonoperating foundation usually established by a donor during his/her lifetime to establish governing rules in anticipation of a large future bequest. Donors may take advantage of more liberal charitable deduction rules, no gifts may be used to build an endowment and all contributions must pass through the foundation no later than two and a half months after the end of the tax year in which the gifts are made.
- Pooled Common Fund: In this model, one or more donors may make contributions that are pooled into a common fund. A donor (or donor’s spouse) may retain the right to designate annually which organizations will benefit from income from donor’s contributions. All recipients of funds must be public charities as defined in Section 509(a)(1) of the tax code. The fund’s governing instrument must provide for distributions and in fact pay out all adjusted net income after certain other requirements are met.This model also provides the donor with substantial control over distribution of funds and donors are subject to more liberal charitable deduction rules.
- Operating Foundation: Directly operates its own charitable program (i.e. running a museum) instead of making grants to other charitable organizations. Donors may take advantage of more liberal charitable deduction rules and the foundation generally must spend at least 85 percent of its investment income directly for the operation of its charitable activities. Other regulations apply (see article).
3) Will the foundation be established as a charitable trust or in corporate form?
Many donors choose to establish a charitable trust because it is simple to create and generally does not require approval by a governmental agency. The law of trusts is based on common laws and is therefore more flexible and less precise than the laws of incorporation. Trusts also have more flexibility in receiving and disposing of real property than nonprofit corporations.
On the other hand, a nonprofit corporation provides greater protection from liability for directors. Directors of a nonprofit corporation are held to less stringent fiduciary standards than trustees of a trust. Delegation of investment decisions, enlarging the governing board or replacing board members may also be handled more effectively in the corporate form.
4) How do I incorporate?
If you choose to incorporate, the foundation’s proposed name should be cleared with the state, and a “certificate of incorporation” or similar document must be prepared in accordance with state laws. The federal requirements for exempt status as a private foundation demand that the certificate include:
- language establishing its charitable, educational or similar purpose in the purpose clause;
- a statement that the earnings of the corporation shall not result in any private benefit to its members, trustees, or officers (except for reasonable compensation for personal services rendered);
- a statement that no substantial part of the corporation’s activities shall consist of attempts to influence legislation (except where that legislation may affect the foundation’s operation) and that it shall not participate in political campaigns;
- a clause providing that on dissolution the assets shall be disposed of for charitable purposes;
- a statement that the corporation will comply with the requirements of Sections 4941, 4942, 4943, 4944, and 4945 of the Internal Revenue Code.
Note: Many purpose clauses are drafted in general language to simplify the process of obtaining tax exemption and to allow the governing board flexibility to modify policy in the future. The purpose clause should be drafted with more specificity if the donor’s intent is to make sure that the foundation adheres closely to particular charitable purpose.
5) Will the foundation created have a limited life or perpetuity?
Most states give perpetual life to corporations created by statute while providing ways for their members and others to terminate them. In most states, trusts created for the benefit of charity can exist in perpetuity. Some donors choose to limit the foundation’s life to a term of years, at the end of which all assets must be distributed.
Following are some issues that must be considered in determining the life of the foundation: Is the foundation’s charitable purpose an area with limited life or one that can be funded in perpetuity? Will work be carried on by future generations or is it something the donor wants to end at a particular point in time? Will the initial endowment carry into the future? Will the foundation raise funds to add to the endowment? Will the foundation set up an investment policy to increase the endowment, or will the intent be for initial endowment to be disbursed, and the foundation dissolved upon final disbursement?
6) What will the governing body look like?
Once a foundation is established, the donor must decide the size, make-up, method of election, and tenure of its governing body. Specifics of the governing body may be outlined in the foundation’s bylaws rather than in the certificate of incorporation because they will be easier to change. The bylaws should contain authorization for appointing committees of the board, electing officers, notice and waiver of notice of meetings, and similar provisions addressing the foundation’s administration. Basically, they should make clear that the board has authority to run the foundation.
7) What is an organizational meeting?
Under state law, corporations generally hold an initial meeting to: elect director(s) and officers, adopt the corporation’s bylaws, pass a resolution to open bank accounts and sign signature cards, establish the fiscal year, adopt a corporate seal, provide for recruitment of initial or interim staff, record the minutes of this meeting and file them with subsequent meeting minutes to be kept for the life of the foundation. This meeting can be held as soon as the state has approved the foundation’s certificate of incorporation, thus making the foundation a legal entity.
8) How do I file for Exempt Status with the IRS?
Upon receiving the certificate of incorporation and adopting bylaws, the foundation can seek exemption from federal income tax. This will assure that contributions to the foundation are tax deductible. A Form 1023 must be filed with the appropriate IRS district within fifteen months of the foundation’s organization under state law. When granted, IRS recognition of exempt status will then be retroactive to the date of organization.
In addition to the Form 1023, a foundation must file for an employer identification number on Form SS-4 (this is necessary whether or not the foundation intends to hire employees). After filing Form1023, the foundation waits for a determination letter from IRS (generally a few months). In the meantime, the foundation must file a Form 990-PF with IRS and state authorities on or before the due date as if the federal tax-exempt status has been determined.