Charitable Entities – A Primer
Volume 4 Issue 4 -- July/August 2000
"I want to give toys to needy children."
"I want to start an organization to assist children in becoming computer literate."
Many discussions in my office begin this way, but most well-intentioned individuals who contact me about organizing a charitable activity have no idea where to begin.
There is an important difference between a nonprofit entity, a tax-exempt entity, and a charity.
Let=s say the Prince Albert County Fair ("the Fair") was incorporated as a nonprofit entity under Virginia law. Merely creating a nonprofit corporation does not mean that the entity is either tax-exempt or a charity.
To be tax-exempt, a number of additional requirements must be met. A federal and state tax ruling may be required.
If it were tax-exempt, the Fair would not be subject to Federal and Virginia corporate income taxation if it had funds left over at the end of the year from its primary activity, running the Fair.
The Fair could not, however, distribute profits to its members or engage in unrelated business activities. If the Fair were to terminate its operations, none of the proceeds from the sale of Fair assets, such as land or equipment, could be distributed to members of the Fair Association.
Could Mr. Muny Bags give his prize bull, worth $125,000, to the Fair and claim a charitable contribution deduction on his federal income tax return, Form 1040? No! Unless the Fair has qualified as a Section 170(c) entity under the Internal Revenue Code, Mr. Bags is not entitled to a tax deduction.
Not all tax-exempt entities are, or can be, charities. A list of entities that have qualified is published in IRS Publication Number 78. An Internet version of Publication 78 can be found on the Internal Revenue Service website at http://www.irs.gov/charities/article/0,,id=96136,00.html or by clicking on the link at the end of this newsletter.
Why is This IRS List Important?
Many would-be charity creators erroneously believe that if their intentions are pure and they, in fact, carry out the work they propose, then contributors to the purpose should get a tax deduction. Unfortunately, Congress has passed laws, implemented by the IRS, which cast a jaundiced eye on new charitable entities. The only way a contributor to most new charitable organizations can obtain an income tax deduction is if the charity has gotten on the Section 170(c) list.
To get on the Section 170(c) list, a nonprofit entity needs to be incorporated under state law with appropriate articles of incorporation, bylaws, and minutes. In most cases, a lengthy IRS form also needs to be filed, and the IRS may actually have to issue a letter saying that the entity meets the requirements for a charity.
Many tax-exempt organizations will need to file yearly reports with the IRS. In addition, the new entity is on a trial status for its first three years during which time the entity must assure the IRS that its receipts and expenditures are being correctly used for the charitable purpose.
Many older organizations, established religious organizations, and governmental entities do not have to be on any list in order for Mr. Bags to obtain a charitable contribution deduction.
It is beyond the scope of this newsletter to delve into the various limitations on gift giving created by the type of entity and the income level of Mr. Bags. A return preparer or tax attorney should be consulted.
What if a new organization does not have the wherewithal or expertise to satisfy the state and federal requirements to become a charity reflected on the Section 170(c) list? One option is to work under the umbrella of an existing charity or foundation.
For example, churches often provide toys to needy children. Charitable individuals could establish such an activity in conjunction with a willing church. Contributions to the church would be tax deductible, subject to IRS limits.
Starting a new charitable organization, and getting it fully recognized as such by the IRS, can be an arduous task. Businesses and individuals should not give large sums to a charity, expecting to obtain a charitable contribution deduction, until they are certain that the charity is on the IRS Section 170(c) list.
Link to IRS Publication 78 (Section 170(c) List)
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