Beyond Yourself, Charitable Giving

So you’ve obliterated all your debt, paid off your credit cards diligently, established an emergency savings fund with 3 to 6 months of expenses in it, purchased the necessary insurance products, what’s next?  The normal attitude of a Western Society would be “let’s save up to buy something big.”  While it’s admirable to be actually saving up for a large purchase, perhaps there’s another option.  Everyone has seen the commercials late at night that show the starving kids of multiple ethnicities with the kindly old grandfather figure asking you to sacrifice a little bit.  Charitable giving is a great way to go beyond yourself and make a difference in the world.  There are as many charitable possibilities as there are causes in the world.  Some cater to animal lovers, feeding the hungry, promoting eduction or children issues, others to environmental causes, others still are religious in nature.  How do you know where to put your dollars to get the biggest bang for your buck?

First, some background.  Taxpayers can often deduct the value of charitable contributions on their tax returns in Schedule A.  This is subject to limits based on income and also assumes that the taxpayer already itemizes.  If you  take the standard deduction on your tax return, you will not see extra tax benefit from charitable contributions.

Contributions can be in the form of cash or property.  Donating used clothing and household items that are in good shape to your local Goodwill store is one way of making a non-cash contribution.  The IRS has guidance available to determine the value of the non-cash deductions.  Many people go even further by working charities into their estate plan to minimize taxes and provide a positive legacy at the end of their life.  Check with your CPA or tax preparer for specific guidance in your situation.

Suppose you want to donate cash directly to a charity.  Charitable organizations, like businesses need cash to operate.  A certain amount of the fund raising they do must cover operational expenses like salaries, marketing, supplies, rent and administration.  The key is to find charities that minimize these expenses as much as possible.  Larger charities are required to submit to the IRS a document with the number 990.  This document contains information on the structure of the charity.  It is also available for public review.

There are other ways to check up on the expense ratio of a charity.  Websites like Charity Navigator, Charity Guide,  The Better Business Bureau and GuideStar (requires registration) give many different ratings on program expense ratio as well as growth percentages and descriptions of the type of work the charity performs.  There are countless other websites and tools available to help you decide.  I found these through a simple search engine query.

Charitable giving lets you go beyond the normal selfish pursuits of society.  In this holiday season, perhaps it’s time to add a charity to your list of gift recipients.  You’ll be surprised to see how much good your donation can do.

Non-profit donations before non-profit status

Q. Can a nonprofit corporation issue tax-deductible receipts while waiting for approval of 501(c)3 status from the IRS? Would the deduction be only for the state in which the nonprofit is located and not for a federal return?

A. Non-profits fulfill a great need in our society. Thankfully, the IRS still considers donations to qualified non-profits to be tax deductible within certain limits. There are certain types of non-profits that do not need to go through the official recognition process with IRS Form 1023.

• Churches, including synagogues temples, and mosques.
• Integrated auxiliaries of churches and conventions or associations of churches.
• Any organization that has gross receipts in each taxable year of normally not more than $5,000.

Regardless, it’s still recommended to get the official blessing of the IRS on your organization.

If your organization does not fall into one of those categories, it is not an official non-profit in the eyes of the IRS or your state (most likely) until Form 1023 is filed and you receive your official acceptance letter.  Donations made to the organization prior to the official designation are likely not deductible.  Even if you are accepted at the federal level, it’s a good idea to look into the requirements of registering your non-profit organization at the state level.  If there are extra steps required to provide non-profit status at y0ur state level, it would be a shame to ignore them and cause confusion amongst your donors.  They want to help fulfill your mission, so make sure you have completed all necessary steps to provide the tax benefit available from the IRS.

Unfortunately, the process of completing the form is onerous. There is a 38-page instruction booklet to mull over for requirements. The application form itself is 30 pages!  There is also a new fee structure.  Just to apply, get ready to hand over at least $400.  According to the application,

The entire process can even take up to a year.  For those with more complicated organizations, an attorney may be necessary to insure that the purpose and structure are properly communicated to the IRS.

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Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.