Individuals are faced with several considerations when deciding to make a contribution. Choosing the right options can help you drive greater impact more efficiently and effectively for the causes you believe in while still gaining the tax benefits.
As you review your options, it’s important to consider:
1) What are the potential tax benefits?
2) Will the alternative(s) you are choosing create any unwanted burdens?
3) What is the cost versus the benefit of your donation?
4) How much of a time commitment will be involved?
5) Will the alternative(s) you are considering offer you any control over the funds?
In this article, we will separate charitable opportunities into two categories:
- Those requiring long-term involvement, such as creating and managing an organization
- Those involving simple gifts of cash or other assets to an established charitable organization with limited or no involvement
Is it better to give your time or your money; or perhaps both? Those that typically require greater investments of time include establishing a not-for-profit organization or volunteering time with an established charity. While those options may also include a financial investment, simply donating to an organization can remove the time commitment altogether. Let’s dive in.
Time and money well spent?
Options to support a cause are wide-ranging, and each carries its own benefits and complications. If your aim is to create and control an organization for charitable purposes, the options include establishing a:
- Private foundation for which there are two broad types: operating and non-operating.
- Public charity which carries requirements for maintaining tax-exempt/public charity status.
- For-profit corporation where the organization will be subject to taxes on net taxable income and be entitled to charitable deductions (subject to limitations).
Before becoming a private foundation or public charity, these organizations must meet certain requirements and obtain approval for tax-exemption. These entities are usually governed by their trustees/board members, and are subject to regulations and laws of the federal, state, and local governments.
In addition to the regulations highlighted below, there are many costs that come with beginning and operating a private foundation or a public charity; including formation costs, and federal and state tax compliance costs. Depending on the intended size and mission reach, the costs of running such an organization could grow rapidly. These costs typically include building the mission, program delivery, fund-raising, grant administration, finding and retaining employees, technology, and corporate governance.
Once you decide to establish a legal entity the important question becomes: Which type of organization best suits your goals?
Private foundations can be either operating or non-operating, as well as designed to support other charities or run programs internally, respectively. They vary from public charities in multiple ways, but the two that stand out are:
- Private foundations provide individuals an opportunity to be heavily involved in a mission, without having public involvement.
- Private foundations are subject to greater restrictions and potentially subject to greater excise taxes if they fail to comply with Internal Revenue Service’s regulations.
Additional restrictions for private foundations include:
- Limitations on transactions with substantial contributors and other disqualified persons
- Requirements to annually distribute cash or property for charitable purposes
- Limitations on investments in private businesses
- Provisions that investments must not jeopardize the carrying out of exempt purposes
- Provisions to ensure that expenditures further exempt purposes
Additionally, there is an excise tax on net investment income for a private foundation. When choosing whether to operate a private foundation, these limitations and costs should be considered.
Notwithstanding the limitations and potential costs, private foundations provide their founders and successors significant benefits. These benefits include:
- Greater control of causes to support and when to support them
- Up front tax deductions and savings
- The establishment of a family legacy
- Family involvement
Public charities provide opportunities to make a lasting impact on a particular mission. Unlike a private foundation, a public charity is subject to a broader array of federal and state laws and regulations. Among them, a public charity must meet an annual requirement to have at least 33.33% of its total support come from the general public. In addition to the requirement to receive support from a diverse class of donors, those parties who govern the organization should generally also be diverse, comprised of varying professionals, and maintain independence for the purposes of good governance.
If the intention is to have more control and less public influence, a public charity may not meet those goals.
Community foundations are public charities with a mission that specifically aim to support the needs of a particular community. Often a community foundation will also have a donor advised fund (further described below) and/or an endowment fund which is utilized to support their programs. Running one such organization is a significant commitment with significant time and costs associated. However, it also provides opportunity to make a significant impact.
With each of these charitable organizations (private foundation, public charity, community foundation) an individual can also choose to support these types of organizations through donations, without the time and cost of entity formation.
Making an impact without breaking a sweat
While the options above involve being more intimately involved with a cause-driven vehicle, below are some alternatives that require little or no real involvement after selecting a cause to support.
Simply supporting a cause or causes
The least administrative burden for an individual would be to simply choose a charity and/or multiple charities whose mission matters to them. The tax consequence would be an available charitable deduction, subject to limitations. While this is the least time intensive option, it provides the opportunity to drive impact not solely with your dollars, but also with your volunteer time. While one may be willing to donate time, doing so without the burden of running an organization may be a more fitting alternative.
With opportunities abound to attend events, walks, galas, golf tournaments, retreats, unique experiences, impactful events, and more, one can choose to focus on those causes near and dear, while also allowing for more choices. If time is a resource, the options are endless. Furthermore, this approach allows flexibility and variety. By supporting other organizations, donors have the chance to sample the buffet. As with most things in life, charitable endeavors can have their season, but this approach presents the chance to participate in varying degrees and drive impact for causes that are timely and relevant to you.
Donor Advised Funds (DAF)
An alternative to donating directly to a charity would be to utilize a Donor Advised Fund (DAF). A DAF is a separately identified fund or account maintained and operated by a 501(c)(3) organization (the sponsor). The donor would maintain anonymity and retain advisory privileges with respect to the distribution of those funds, which are ultimately controlled by the board of the sponsor. The donor receives a charitable contribution deduction (subject to limitations) at the time they make their contribution to the DAF. Be aware that some benefits, such as donor anonymity, may change based on pending legislation.
Benefits of a DAF include:
1) No minimum distribution requirement
2) Convenient account set up, usually with minimal fee
3) Reduced administrative burden
4) Public charity tax exempt status (through the sponsoring organization)
5) No annual tax filing requirement
A DAF would reduce your control beyond advisory privileges.
Other options, not specifically covered here, are more geared towards estate/death tax planning such as charitable remainder trusts, revocable and irrevocable trust, Living Trusts, etc.
What does CohnReznick think?Each individual situation is unique. Knowing the range of options available, and the impact and consequences of those options is an important first step in determining when and how to give. Once a path is determined, it is important to ensure you have the proper resources to support your philanthropic goals, and meet the legal and tax-related compliance requirements.
Subject matter expertise
CPA, MST, Partner & Exempt Organizations Tax Services Leader
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