Knowing your options for providing assistance is the first step toward making a big impact on communities that have been devastated by disaster. Even the most seasoned donors or nonprofits can fall victim to opportunistic entities that divert funds from charitable causes to pad their own pockets. In the wake of recent disasters, this exclusive issue of Nonprofit Advisor offers guidance to help you identify the best options available, so you can provide powerful assistance to the people who need it most.
Recognizing Fake Charities
The Internal Revenue Service (“IRS”) permits any existing charity with a valid determination letter to engage in disaster relief activities without obtaining prior approval. The disaster relief activity is reportable as a new program activity on the annual Form 990 if the organization had not previously engaged in disaster relief activities.
When selecting a charity, perform a quick background check using credible resources. Three great options include:
- IRS website: In response to the recent hurricanes, the IRS website has issued a warning about possible fake entities and offers a search function that verifies the status of recognized charities: Exempt Organizations Select Check https://apps.irs.gov/app/eos/
- Guidestar website, which verifies tax-exempt status: http://www.guidestar.org/Home.aspx
- Charity Navigator, which has compiled a list of highly rated organizations responding in the aftermath of the earthquakes and hurricanes and provides assistance to the communities affected: https://www.charitynavigator.org
Also, beware of email phishing scams—don’t click unfamiliar links. Go to the website independently after you verify the site’s legitimacy by using one of the above options.
Applying for Tax-Exempt Status
If you are interested in establishing a new charity for a cause that you are passionate about, it’s important to keep these key details in mind to maximize your efforts:
- Expedited Procedures: The IRS offers procedures to expedite new applications for exempt status for organizations seeking to provide disaster relief. However, your purpose for providing disaster relief must cover a broad class of people. It cannot be limited to a specific individual, family, or group of people, unless the term of the relief program for the specific group is indefinite.
- Immediate Contributions: Contributions to a newly formed charity cannot be acknowledged as tax deductible to the donor until the charity receives a determination letter from the IRS with the effective date of the exemption.
- Recordkeeping: New charities must comply with recordkeeping and reporting requirements for both Federal and state purposes. Many states require registration with the Attorney General’s office or the Consumer Protection Division prior to soliciting funds from the public.
- Annual reporting: Failure to perform annual reporting for consecutive three-year periods results in revocation of exempt status. Any charity that raises or expects to raise $50,000 or less on an annual basis can apply for tax-exempt status with the IRS using Form 1023EZ rather than the full Form 1023 application. Likewise these charities can file Form 990-N, an electronic postcard on an annual basis to maintain their tax-exempt status. Form 990-N requires that you report only basic contact information. Friedman LLP offers a Form 990-N filing service for a minimal fee or, in certain cases, pro-bono to reflect our commitment to the nonprofit community.
To qualify for expedited processing of an application on Form 1023, you must demonstrate that the organization is meeting an immediate need of disaster relief and providing relief will be adversely affected if the tax-exempt status is not granted quickly.
Charities providing disaster assistance are required to keep adequate records that show the type of assistance provided, criteria for disbursing assistance, date, place, estimated number of victims assisted and the cost of the aid.
Qualified Disaster Relief Payments (IRC Sec 139)
Qualifying disaster payments can be made from any source, including by employers, to reimburse or pay for individual(s) expenses in connection with qualified disasters and are not taxable as income. They are also not subject to employment taxes or withholding.
A qualified disaster is defined in Sec 139 as:
- Results from terrorist or military actions;
- Results from an accident involving a common carrier;
- A Presidentially declared disaster;
- An event that the Secretary of the Treasury determines is catastrophic.
Disaster payments are qualified if they are due to the result of a qualified disaster. Qualified disaster payments include the following, reasonable and necessary:
- Personal, family, living or funeral expenses;
- Expenses for the repair or rehabilitation of a personal residence;
- Repair or replacement of the contents of a personal residence.
Qualified disaster payments do not include expenses otherwise covered by insurance reimbursement or income replacement payments.
If you are interested in providing relief for the recent Hurricane Harvey and Irma victims, the IRS has released the following guidance to help you navigate options:
- Leave-based donation programs permit employees to elect to forgo vacation, sick or personal leave in exchange for employer contributions to charitable organizations. Payments made by the employer to organizations providing Hurricane Harvey relief will not be taxed as wages to the employee when paid before January 1, 2019.
- Leave-sharing donations should not be included in Box 1, 3 or 5 of Form W-2 and the employer can deduct the payments as ordinary and necessary business expenses under IRC Sec. 162 rather than IRC Sec. 170.
- Specific to Hurricane Harvey, the relief postpones various tax filing and payment deadlines starting August 23, 2017. Affected individuals and businesses now have until January 31, 2018 to pay and file returns that are due during the relief period.
- Specific to Hurricane Irma, the relief postpones various tax filing and payment deadlines starting September 4, 2017, for affected Florida victims and starting September 5, 2017, for Puerto Rico and U.S. Virgin Island victims. Affected individuals and businesses now have until January 31, 2018 to pay and file returns that are due during the relief period. (Note that the effective dates for Florida and the Caribbean appear to be inverted, because Hurricane Irma made landfall in the islands, September 4, 2017, before making landfall in Florida, September 5, 2017).
- Retirement plan loans and hardship distributions for Hurricane Harvey victims: Employer-sponsored retirement plans, including 401(k) plans, can make loans and hardship distributions to victims and family members that are not subject to statutory limitations. Hardship withdrawals must be made no later than January 31st, 2018.
- We expect the IRS to publish similar guidance with respect to Hurricane Maria, in the near future.
Additional recommended resources include the following:
Internal Revenue Service https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
IRS Publication 3833 https://www.irs.gov/pub/irs-pdf/p3833.pdf
National Council of Nonprofits https://www.irs.gov/pub/irs-pdf/p3833.pdf
If you would like to learn more about how to provide disaster assistance or form a charity please contact your professional advisor at Friedman LLP.