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Non-Profit Organizations

Is Your Tax-Exempt Organization Truly “Exempt” From Sales and Use Tax?

By Non-Profit Organizations

The Internal Revenue Service commonly refers to charitable organizations as nonprofit entities, 501(c)(3) organizations, or tax-exempt entities. Unfortunately, this implied reference to tax exemption will not always be the case. The Internal Revenue Code provides an exemption from federal income tax, and although most states also apply this exemption to state income tax, it does not automatically apply to state sales and use tax. Read on to learn more about which activities may be exempt from sales and use tax.

Unlike the exemption from federal income tax, not all tax-exempt entities are automatically exempt from sales and use tax. To determine whether or not your organization is exempt from sales tax, you will need to consider the home state of your organization and the type of organization you are operating. In most states, tax-exempt organizations are required to pay sales tax on their purchases and to charge sales tax on the items they sell. Some states, however, allow certain types of nonprofit organizations a special exemption from sales tax. This exemption is generally limited to the purchase of items to be used for their exempt purpose. In addition, many states require the nonprofit organization to go through an application process to receive sales tax exemption status.

California Sales and Use Tax Exemptions

In California, although many nonprofit and religious organizations are exempt from federal and state income tax, the state does not provide a similar broad exemption from sales and use tax. Generally, nonprofit and religious organizations are treated just like other for-profit California sellers and buyers for sales and use tax purposes.

California defines sales and use tax as the following:

Sales tax” applies to the sale of tangible personal property, unless the sale is covered by a specific legal exemption or exclusion. Individuals, businesses, and groups that sell taxable merchandise in California must pay sales tax on their taxable sales.

Use tax” applies to the purchase of taxable merchandise that will be used, consumed, stored, or given away in this state unless the purchase is exempt or excluded from tax. Individuals, businesses, and groups must pay use tax on their taxable purchases. The state use tax is complementary to, and mutually exclusive of, the state sales tax – you will never be required to pay both.

Although there is no broad exemption, California does allow for some special exemptions and exclusions from sales and use tax for certain nonprofit and religious organizations. Some organizations may not owe tax on any of their sales, whereas others may only owe tax on certain types of sales, but not all sales. Other organizations may be responsible for tax just like other California sellers. It all depends on which type of organization you have as well as your organization’s practices and activities.

Nonprofits also carry out certain activities that are not considered sales for sales tax purposes. These activities generally are not subject to sales or use tax. Examples include:

  1. Gifting of merchandise as a true donation.
  2. Sales of tickets for concerts, movies, plays, shows, and similar events when food and meals are not included in the ticket price.
  3. Sales of tickets for game booths and raffles when prizes are not guaranteed to every ticket purchaser.
  4. Sales of travel, home rentals, guide services, personal services, tutoring, and other things of value that are not physical products.
  5. Sales of gift cards, gift certificates, and coupon books.
  6. Membership drives and other fundraising activities that do not involve the exchange of merchandise, or that include merchandise premiums of a much lower value than the donation or membership amount.
  7. Sales of advertising that do not involve an exchange of merchandise or goods.

Sales and use tax exemption rules for nonprofit organizations vary from state to state. The home state of the organization and the type of organization are primary factors in determining the exempt status. It is important for nonprofit organizations to be aware of, and comply with, the rules of their state. If you have any questions regarding whether or not your nonprofit organization is exempt from sales and use tax, please do not hesitate to contact our office at (858) 558-9200.

In CRTs We Trust

By Non-Profit Organizations

Do you want to give money to charity while also maintaining a steady flow of income for yourself or your beneficiaries? There are two major ways to give back that will do just that through charitable remainder trusts: CRUTs and CRATs. But what do these acronyms mean? Let’s take a look at the definitions and differences between Charitable Remainder Unitrusts (CRUTs) and Charitable Remainder Annuity Trusts (CRATs).

CRT Basics

A charitable remainder trust (CRT) has similarities to other irrevocable trusts – where assets are contributed to the trust and a beneficiary receives income distributions. The difference is that in a CRT, at termination of the trust, any remaining amount is distributed to one or more charitable organizations rather than your beneficiaries. A CRT is irrevocable and the term of the trust can vary. Because the remainder is going to charity, you can take part of the contribution to the trust as a charitable deduction. It is the best of both worlds – you can commit to making a charitable donation without completely relinquishing the current benefits of holding the assets. In addition, the assets you are permitted to donate to a CRT are not limited to cash. You can also donate real estate, publicly traded securities, and stock in some closely-held corporations.

Benefits and Downsides of CRTs

The benefits to creating a CRT are that you can:

  • Maintain an income stream
  • Make a tax-efficient charitable deduction
  • Avoid capital gains on a highly appreciated stock position and invest the proceeds in a diversified portfolio.
  • Reduce the size of your taxable estate

The downsides of forming a CRT are:

  • Loss of control. CRTs are irrevocable, so once the assets are put in the CRT, they can’t be taken out.
  • Costs to setup and maintain the trust.
  • Risk of poor financial performance.
  • Unrelated business income (UBI). This can result in significant tax being paid even though the CRT has tax-exempt status.

What are CRUTs and CRATs?

When there are charitable and noncharitable beneficiaries in the same trust, the CRT must be designated as a CRUT or CRAT. A charitable remainder unitrust (CRUT) has variable annual payments that will fluctuate instead of remaining constant. This means that you might earn more or less from your CRUT based on the performance of the financial market in a given year. A charitable remainder annuity trust (CRAT) has fixed annual payments that do not fluctuate based on the market. Annuity payments are based off of the original balance of trust assets, whereas unitrust payments are based on the current value of the trust assets.

Choosing Between a CRUT or CRAT

There are a few things that can help you decide whether you want your CRT to be a CRUT or a CRAT. Some of these factors are your age, economic outlook, risk tolerance, flexibility, and the importance of the charitable deduction. In terms of age, donors under the age of 65 typically prefer CRUTs because they could offer more opportunity for growth over the years. Similarly, if it appears that there will be continuous economic growth in the stock market, a CRUT will generate higher annual payments versus fixed payments from a CRAT. If you will be primarily dependent on the income from the CRT, then it makes more sense to use a CRAT rather than a CRUT because a CRAT provides fixed annual payments while a CRUT could result in significant fluctuations in annual payments. Your choice in CRT also depends on whether or not you want to make additional contributions. A CRAT cannot accept additional gifts, while a CRUT can.

It is important to carefully consider the benefits and costs of choosing which type of charitable remainder trust will best suit your needs and fund your chosen charity. If you have any questions regarding whether a CRUT or CRAT is right for you, please do not hesitate to contact our office at (858) 558-9200.

The Life Cycle of a Tax-Exempt Organization

By Non-Profit OrganizationsNo Comments

An organization that seeks to obtain tax-exempt status must be properly formed, and must follow a prescribed process in order to apply for and maintain this status. Furthermore, when it terminates, the organization must also follow the appropriate steps for dissolution.

Forming an Organization: In order for the IRS to recognize an organization’s exemption, the organization must be organized as a trust, a corporation, or an association. It is crucial to choose the appropriate type of entity for your organization as it will impact your future charitable endeavors. More information about potential entity types is available here.

Applying for Tax Exempt Status: The organization must have one or more qualified exempt purpose stated in its organizing document.  There are different filing requirements for different types of organizations, so it is important to be aware of the forms required, the user fee, the filing deadline and the processing procedure for each type of organization. While waiting for the application to be processed by the IRS, the organization may begin operating as a tax-exempt organization. However, most organizations are required to file an annual information return or electronic notice while their application for exemption is pending.

Annual Reporting & Filing: Generally, tax-exempt organizations are required to file annual returns. However, the forms used may vary depending on the type of organization, such as Form 990 for public charities and Form-990 PF for private foundations. If an organization does not file the required tax return in a timely manner, penalties may accrue in addition to any taxes owed. Additionally, if an organization fails to file as required for three consecutive years, it will automatically lose its tax-exempt status. Estimated tax payments are required if an organization expects its tax for the year to be $500 or more. Furthermore, if an organization has $1,000 or more of gross income from an unrelated business, Form 990-T must also be filed.

How to Retain Exempt Status: Organizations must continue to perform activities that are consistent with their stated purpose when they applied for tax-exempt status.  A tax-exempt organization qualifying under section 501(c)(3) must run activities which meet the following criteria:

  • Refrain from participating in the political campaigns of candidates
  • Restrict its lobbying activities to an insubstantial part of its total activities
  • Ensure that its earnings are not used for the benefit of any private shareholder or individual
  • Not operate for the benefit of private interests
  • Not have purposes or activities that are illegal

Termination of Exempt Organization:

In general, tax-exempt organizations that end their operations, whether by terminating tax-exempt operations, transferring assets or merging with another tax-exempt organization, must inform the IRS about the details of the action.  Depending on the type of organization, a final annual return may also be required. For more information on dissolving a tax-exempt organization in California, click here.  Charitable organizations in California must obtain permission from the Attorney General’s office in order to dissolve.

There are varying requirements for different types of non-profit organizations. It is crucial that proper tax treatment is applied to the specific type of organization. For more information, please contact our office at (858) 558-9200.

How to Make Tax Time a Little Less Painful: A Checklist

By Non-Profit OrganizationsNo Comments

Now that 2018 has come to an end, tax time is just around the corner! As the 2019 busy season creeps up on us, it becomes increasingly important to begin gathering any documents and information necessary to prepare tax returns. Sometimes it can be difficult to keep track of all of those items, or to even know what is relevant.

In an effort to make this process as easy and painless as possible, Lindsay and Brownell has created a checklist of the most common questions we ask, and the items we typically need when preparing your nonprofit tax returns. By providing us with this information, it will help reduce the time needed to prepare your return as well as eliminate some of the back and forth resulting from open items or unanswered questions.

Return of Public Foundation (Form 990)

General

  1. Since formation, has there been a name or address change?

Part I – Summary

  1. Any changes to the organization’s mission or most significant activities?
  2. Any changes to board of directors and voting members?
  3. Total number of individuals employed during the calendar year.
    1. If relevant, enclose W-2(s).
  4. Total number of volunteers (estimate if necessary).
  5. Enclose the trial balance or financial statements.
  6. Did the organization earn any investment income?
    1. If yes, enclose the year-end statements showing year-to-date income.
  7. Were any grants paid?
    1. If yes, enclose the name, address, date, and amount for each.
  8. Did the organization conduct any fundraising activities?
    1. If yes, provide income and expenses related to the largest two fundraising events.

Part III – Statement of Program Service Accomplishments

  1. Were there any changes to your 3 largest program expenses? If no, skip this section and move to part IV.
  2. If yes, what were the three largest program services?
    1. Include a brief description of the activity, as well as any revenue, grants, and expenses for each activity.

Part IV – Checklist of Required Schedules

See Checklist Provided Below

Checklist

Part V – Statements Regarding Other IRS Filings

  1. Provide the number reported in Box 3 of Form 1096.

Part VII – Compensation of officers, directors, etc.

  1. Were any directors or officers compensated for their services?
    1. If yes, include Forms W-2 (regardless of whether the organization runs on fiscal or calendar year).
  2. Were any employees compensated more than $100,000?
    1. If yes, include Forms W-2.

Part VIII – Statement of Revenue

  1. Provide a list of all donations received including donor name, date, and donation amount.

Part IX – Statement of Functional Expenses

Provide allocations for each expense account among program service expenses, management and general expenses, and fundraising expenses. Please also make note of which activity each program service expense relates to.

Return of Private Foundation (Form 990-PF)

General

  1. Since formation, has there been a name or address change?

Part I – Analysis of Revenue and Expenses

  1. Enclose the trial balance or financial statements.
  2. Did the organization earn any investment income?
    1. If yes, include year-end statements.

Part II – Balance Sheets

  1. Did the organization hold any investments in stock or bonds?
    1. If yes, include monthly statements indicating cost basis and fair market value for all cash and security accounts.

Part IV – Capital Gains and Losses

  1. Were any securities or investments sold?
    1. If yes, include Form 1099 or year-end statements showing the proceeds and basis of all investments sold.

Part VIII – Information about Officers, Directors, Trustees, etc.

  1. Were there any changes to the board of directors?
  2. Were any directors or officers compensated for their services?
    1. If yes, include Forms W-2.
  3. Were any employees compensated more than $100,000?
    1. If yes, include Forms W-2.
  4. Were any independent contractors paid more than $50,000?
    1. If yes, include the name, address, type of service description, and amounts paid.

Part XV – Supplementary Information

  1. Were any grants paid?
    1. If yes, enclose the name, address, date, purpose of grant, and amount for each.

In addition to this checklist, we have attached a questionnaire which can help determine if any additional schedules are required. If this is the case, we can send you a detailed spreadsheet that can be filled out and sent back to us to provide additional information needed for the schedule(s). Although these are helpful tools, they may not be all-inclusive for your specific not-for-profit organization. If you have any questions regarding whether certain information is relevant to your nonprofit tax return, please do not hesitate to contact our office at (858) 558-9200

How to Land on Santa’s Naughty Not-for-Profit List

By Non-Profit OrganizationsNo Comments

It’s that time of year again when Santa and his elves are hard at work, and people are most open with their hearts and their wallets to give back to their communities. Here are some tips for staying off of Santa’s Naughty Not-for-Profit List.  The consequences for which won’t be coal; your organization could lose its tax-exempt-status!

Following these steps will help your organization stay on Santa’s Nice Not-for-Profit List and maintain your tax-exempt status as a not-for-profit organization.

1. You Better Not Forget to File

All non-profits must file a Form 990 annually. The Pension Protection Act of 2006 added a law that provides for automatic revocation of an organization’s tax-exempt status if it fails to file a required information return for three consecutive years

2. You Better Not Lobby Too Much

Lobbying is when an organization contacts, or urges the public to contact members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or when the organization advocates the adoption or rejection of legislation. While a nonprofit organizations is allowed to do some lobbying, too much can result in revocation of its tax exempt status

3. You Better Not Be Involved in Political Activity

Nonprofit organizations are prohibited from participating in any political campaign on behalf of any candidate running for public office.

4. He Sees When There is a Private Benefit or Inurement

Private Benefit

The activities of a nonprofit should be directed toward an exempt purpose and this purpose should not serve the private interest, or private benefit, of any individual or organization more than insubstantially.

Inurement

A nonprofit is prohibited from allowing its income or assets to benefit insiders. Insiders generally include board members, officers, directors and important employees of the organization.

5. He Knows When There is Too Much Unrelated Business Income

Earning too much income generated from unrelated activities can lead to the revocation of an organizations tax-exempt status. This is income that is derived from a trade or business unrelated to the organization’s exempt purpose. However, it is important to keep in mind that there are many modifications, exclusions, and exceptions to this rule.

6. He Knows If the Operation is in Accord with State Exempt Purposes

A nonprofit must pursue the exempt activities promised in its IRS application for exempt status. If an organization has deviated from its original purposes, it must inform the IRS to prevent future problems.

It can be easy to land on Santa’s Naughty Not-for-Profit List and it is important to be aware of these situations that can cause your organization to lose its tax-exempt status. If you have any questions regarding this, or any other tax matters, please do not hesitate to contact our office at (858) 558-9200.

3 Reasons Why Your Nonprofit Might Want an Audit

By Non-Profit OrganizationsNo Comments

In our previous article, we discussed the thresholds that trigger an audit requirement for nonprofit organizations. But what if a nonprofit organization with less than $2 million would like audited financials? The benefits may be worth the extra time and money spent.

In California, a nonprofit organization is required to have its financial statements audited by an independent CPA when its gross annual revenue exceeds $2 million. However, a nonprofit organization might want to consider conducting an audit even when the law does not require it. A cost-benefit analysis should be considered by the board of the organization to determine whether an audit is appropriate as the advantages may very well outweigh the cost.

  1. One advantage of an audit is its ability to offer financial transparency. It is difficult to put a price on the peace of mind that financial transparency can provide to an organization’s board, donors, and to the public. Audited financial statements can express the board’s confidence in the organization’s activities and best practices, regardless of minimum thresholds.
  2. A published independent audit report may even increase donations. Donors want to ensure their contributions are being used properly and going to organizations with internal controls with thorough financial reporting processes. Audited financial statements displayed for the world’s viewing can do just that.
  3. Additionally, an organization can increase revenues with audited financial statements when applying for grants and funding. Many private and public foundations actually require nonprofit organizations to conduct an audit to be eligible for their funding. Audited financial statements provide assurance to funders that the organization’s operations are free of material misstatements. Again, it shows the organization’s integrity and willingness to be transparent to its donors.

While the consistent publication of audited financial statements can open doors for the nonprofit organization, the aforementioned cost-benefit analysis should always be reviewed. For instance, if the nonprofit is considering applying for a $5,000 grant and the funder requires audited financial statements, the process may not be financially worth it. Increase the grant to $50,000 and the organization has a good argument to conduct an audit. For smaller organizations that desire financial transparency, the board may consider a review or compilation as a viable lower-cost alternative.

Please feel free to contact your L&B professional at 858-558-9200 to further discuss these details.

Audit Requirements – Does your organization meet these requirements?

By Non-Profit OrganizationsNo Comments

Nonprofits and charitable organizations must conduct independent regular audits and single audits if specific requirements are met. California guidelines call for an independent audit of the financial statements if revenue meets or exceeds $2 million. Federal guidelines were modified in 2013, but still call for a single audit if the expanded threshold is met.

Nonprofit organizations in California must comply with both federal and California guidelines for audit requirements. California’s requirements for charitable organizations are set by the Nonprofit Integrity Act of 2004, which was enacted as a state level response to the Sarbanes-Oxley Act.

California’s Nonprofit Integrity Act of 2004 requires that charitable organizations with gross revenues equal to or greater than $2,000,000 to do the following:

    1.  Establish an audit committee: Members of the audit committee cannot include the staff, CEO or president, or CFO or treasurer of the nonprofit. The committee may contain members that also serve on the organization’s finance committee, if one exists, as long as those members comprise less than 50 percent of the audit committee. Finance committee members are not allowed to serve as the audit committee’s chairperson.
    2.  Determine if executive compensation is “just and reasonable”: The trustees of a nonprofit are required to review and approve executive compensation (including benefits) at the time of hire, term renewal or extension, and modification.
    3. Make available independently audited annual financial statements: The charitable organization must prepare annual financial statements audited by an independent certified public accountant. The financial statements are required to be made available to the California Attorney General and to the general public within nine months of the fiscal year end of the prepared financial statements.

A single audit (Subpart F Audit) must be conducted if the nonprofit receives federal funds from one or more government funding sources and expends $750,000 or more of the federal funding in one fiscal year. Federal funds may include grants or government contracts and may be received directly from the federal government or from pass-through entities. Pass-through entities may include state and local government agencies.

Single audits are more encompassing than regular independent audits and consist of examining the nonprofit’s financial records, statements, internal controls, received during the period being audited that meets the specific criteria. They are designed to ensure that the federal funds have been appropriately used and reported in the nonprofit’s financial statements.

Nonprofits and charitable organizations must be compliant with both federal and state provisions when receiving federal assistance. In California, this means complying with the Nonprofit Integrity Act of 2004 if gross revenue is $2,000,000 or greater. For federal purposes, this means complying with guidelines under the Single Audit Act of 1984 Uniform Guidance Subpart F, if the organization expends federal funds in excess of $750,000.

Please feel free to contact your L&B professional at 858-558-9200 to further discuss these details.

So You Want to Work with a Foreign Charity – Here’s What to Know

By Non-Profit OrganizationsNo Comments

There are so many great causes private foundations want to support, and with such a globalized society, those causes are often based in international territories. Though a bit trickier than giving grants to a domestic organization, there are luckily still ways to contribute to international efforts.

Take, for instance, the hypothetical private foundation JiJi for a Better World. They are looking for new opportunities to give and they think they have found a great option, there is just one issue: JiJi for a Better World wants to support an organization that is foreign called Kitties Incorporated.   JiJi believes that the cause and mission statement of Kitties Incorporated align with the core beliefs of their foundation. Unfortunately, foreign corporations cannot be confirmed as public charities by the IRS. Fortunately for JiJi for a Better World, there are multiple alternate methods for making this charitable donation a possibility.

In the past, attorneys could prove an international organization qualified to receive contributions as a public charity under IRS regulations for a specified time period. Tax reform now allows Certified Public Accountants and Enrolled Agents to do the same.

Another viable option for JiJi for a Better World is to donate to a non-profit that is a “friends of” organization. For example, the organization can donate to another non-profit that works directly with Kitties Inc., such as “Friends of Kitties Inc.” These types of organizations work side by side with the target foreign charity to support its mission. Another viable option is if Kitties Inc. has a subsidiary that has a U.S. domestic base of operation such as US Kitties Inc. They would have a direct relation to the official Kitties Inc. and thus be a channel JiJi for a Better World could utilize. Both of these options are supported under IRS legislation and can easily be a donation-ready option for JiJi for a Better World. These methods would be a donatable option for JiJi for a Better World without the tax liability risks associated with giving grants directly to a non-public charity. The organizations themselves bear the responsibilities, regulations, and risks of sending the donations to the main foreign organization.

This is great news for JiJi for a Better World and also for you! With multiple safe and effective options available to private foundations, there are many opportunities to donate outside traditional domestic channels. Hopefully, you will not feel limited in your generous philanthropic expenditures to better the world.

If you would like more information on this topic or others, or to look at potential international charities you would like to make grants to, please do not hesitate to contact our office at (858) 558-9200.

Making Waves: The Top 3 Non-Cash Donation Issues to Consider:

By Non-Profit OrganizationsNo Comments

Surf’s up! The sun is shining, the kids are out of school, and family vacations are all in order…summer is finally here! The 2017 tax season is behind most of us (the extended due date is October 15th). This summer is the perfect time to start thinking about how non-cash donations can affect your not-for-profit organization. Grab your beach bag and let’s dive into the top three issues surrounding non-cash donations that are making waves in the not-for-profit world today.

The Top 3 Non-Cash Donation Issues to Consider:

  1. Receiving Donated Property – Written Contemporaneous Acknowledgement
    • When an organization receives cash or property, it is the donee’s responsibility to provide a contemporaneous written acknowledgement letter to the donor if the donation is over $250. The word “contemporaneous” may sound “fishy”, but it is defined as, “existing or occurring in the same period of time.” In this case it means that this statement needs to be provided to the donor before they file the tax return or when the tax return is due; whichever is earlier. Additionally, it needs to include the following information:
      • A summarized statement of any goods or services the organization provided to the donor in exchange for the contribution
      • If the above applies, then a good faith estimate of the value of the goods received in return must be included
      • Deductible amount (typically the value of the donation reduced by the value of goods and services received by the donor)
  2. Potential Consequences if a Donated Asset is Sold Within 3 Years
    • Many individuals donate assets to organizations for a tax deduction, but the organization’s intent isn’t always to use the asset to fulfill its mission. If the organization plans on selling the donated assets for cash, there are additional steps that need to be followed. If an asset is sold within three years of the donation, the organization needs to file Form 8282, Donee Information Return, unless the property is valued at $500 or less or is distributed/used for a charitable purpose. This form is required to be filed with the IRS within 125 days of the date of disposition, if not, there could be a $50 penalty per form not filed. There are additional requirements if the original donee organization sells it to another charitable organization.
  3. Accounting for Donated Assets sold for Less than the Appraised Value
    • When an organization sells an asset that had been previously received for less than its appraisal value, the accounting for the asset needs special attention. For example, an individual donates a piece of art depicting the infamous Jaws with an appraisal value of $20,000. If the portrait sells for less than its appraisal value, the difference between these two amounts becomes Contribution Revenue. This seems counter-intuitive since it’s actually decreasing the organization’s revenue. However, in this situation, it becomes imperative to notify the asset’s donor, as the IRS could adjust the deduction amount reported on their tax return. Please see our article as it pertains to the donor here.
Non-cash Donation Thresholds Contemporaneous written acknowledgement  

File form 8282

Obtain a qualified appraisal Attach appraisal to tax return when filing
=$250  
$250-$500 X
= $500-$5,000 X X
= $5,000 X X X
= $500,000 X X X X

This chart is a quick overview of the non-cash donation thresholds. It provides general rules-of-thumb for the donor and donee when receiving or making non-cash donations.

Sunsetting Thoughts

The above scenarios are important to consider, both as the donor and the donee. Taking some time to think about these situations could be beneficial to saving time and money in the future. Whether it’s laying out in the sun, enjoying long walks on the beach, or spending time with family, summer time is all about making waves and staying cool on what’s important in the not-for-profit world today. If you have any questions, please do not hesitate to contact your L&B professional at (858) 558-9200.

Best Practices when Distributing from a Private Foundation

By Non-Profit OrganizationsNo Comments

When private foundations disburse out funds to other organizations, it is important to make sure that donations are going to IRS-qualified organizations to minimize the net investment income tax assessed. Even when the funds are going to support a cause that seems charitable in nature, not all distributions of funds are considered qualifying distributions by the IRS. Read on to learn more about four instances when contributions to an organization may not be qualifying distributions.

Choosing an Organization

In general, when distributing funds to another organization, the easiest way to ensure that a donation will be a qualifying distribution is to donate your money to a public charity registered as a 501(c)(3) organization. If you’re unsure which organizations qualify as a 501(c)(3) public charity, the IRS and the California Attorney General’s Office have provided handy ways to search for tax-exempt entities. By using this search page on the IRS website or this search page on the California Attorney General’s Office website, you can look up any exempt organization and determine whether it is registered as a public charity.

Organizations to Beware Of:

1. Crowdsourcing Websites

Donations made online through websites like Kickstarter, GoFundMe, or YouCaring are generally not qualifying distributions because they are not made to a 501(c)(3) public charity. Unfortunately, though supporting altruistic causes such as helping a family after tragedy strikes or funding a park clean-up effort, they are still not considered qualifying distributions in the eyes of the IRS.

2. Foreign Charities

An organization must have been created under the laws of either the United States, any individual state, or any United States territory to qualify as a 501(c)(3) public charity. If a charity operates abroad, it must still have been formed within the United States for donations to be qualifying distributions. Thus, a donation to the American Red Cross would be a qualifying distribution while a donation to the British Red Cross would not.

3. Political Recipients

Contributions to politicians or political organizations are not qualifying distributions. The IRS specifically excludes donations made for the benefit of a politician or a political agenda from being qualifying distributions. In addition, the IRS states that private foundations are “absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) a candidate for public office.” Any private foundation found to have violated this rule may lose its tax-exempt status and/or be subject to certain excise taxes.

4. Other Private Foundations

When making a contribution from one private foundation to another, the donor must take certain additional steps to certify that the money is going to support a qualified charitable purpose. The donor private foundation must make inquiries to determine that the private foundation receiving the funds can be trusted to spend the grant money only for the purpose for which the grant was made. A written grant agreement must be signed by both the donor and donee private foundation and the donee private foundation must submit reports to the donor on how it is using the grant money.

It is not always clear if a donation made in the spirit of charity will actually be deductible under the tax code. These are just a few scenarios where a contribution may not be a qualified distribution. If you are having trouble determining whether a donation you would like to make would be tax-deductible, please do not hesitate to contact your L&B professional at (858) 558-9200.

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