Disaster relief provisions are traditionally triggered when forces of nature are unleashed-- such as, a severe storm causing flooding, landslides or mudslides; hurricanes; wildfires; tornadoes or earthquakes. A global pandemic, of course, qualifies as a disaster.
This exclusive Nonprofit Advisor will help you to identify powerful assistance options for disaster victims—ensuring that you provide resources for those who need them most.
Responding Effectively to the Most Urgent Need of our Lifetimes
Even the most seasoned donors and corporate philanthropists can fall victim to scam artists who create the impression of a valid charitable cause. These tips will help you verify the legitimacy of disaster relief assistance opportunities and ensure your charitable dollars have the greatest positive impact.
Identify Legitimate Charities
Donors are bombarded with solicitations to help disaster victims over a variety of platforms. Use these resources to verify charitable status before donating:
- The IRS website has a search function to verify the status of recognized charities: Exempt Organizations Select Check https://apps.irs.gov/app/eos/
- The Guidestar website posts the tax-exempt status and copies of recently filed Form 990s: http://www.guidestar.org/Home.aspx
- Charity Navigator compiled a list of highly rated organizations that respond in the aftermath of earthquakes and hurricanes and provide assistance to affected communities: https://www.charitynavigator.org
Providing Relief Through an Existing Charitable Organization
Existing charities, including private foundations, may engage in disaster relief activity without obtaining prior permission from the IRS. Disaster relief activity is reportable as a new program activity on the annual Form 990 if the organization has not engaged in disaster relief activities previously. Providing assistance through charitable organizations enables donors to claim a tax deduction for their contributions.
Help Specific Victims
Frequently, members of a community may wish to assist a single victim or family who suffered uniquely severe hardship. Community members can make non-taxable gifts to individuals, but those gifts are not eligible for a tax-deduction. Similarly, donors can designate contributions made to charitable organizations for a class of disaster victims, but not specific victims, in order to be tax deductible contributions.
Aid to individuals by a charitable organization must meet the criteria of a broad “charitable class.” The class must be large or indefinite enough that potential beneficiaries cannot be individually identified (see Qualified Disaster Relief Benefits below for an exception). Charities need to maintain documentation that supports the need of the individuals qualifying for assistance. This includes, but is not limited to, how the recipients were selected; description of the assistance provided; name, address and amount distributed.
Tax Deductible Contributions
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides for:
- A $300 above-the-line charitable deduction for individuals that do not itemize deductions;
- Unlimited charitable contributions for individuals that do itemize (increased from 60% of adjusted gross income, but 50% of the contributions must be made in cash, versus appreciated stock)
- Limits on cash and food inventory contributions by businesses increased to 25% of taxable income.
Written acknowledgments must be obtained for any contribution made by check, credit or debit in the amount of $250 or more, and for any amount if made in cash. To meet the minimum substantiation requirements, acknowledgments must include: date of the donation, donor’s name, organization’s name, amount and a statement about whether the organization provided any goods or services in return for the contribution.
Similarly, noncash contributions must also be acknowledged and, in addition to the minimum substantiation requirements above, need to include a reasonably detailed description of the item. For gifts of more than $5,000 charities must complete the applicable sections of Form 8283.
Noncash contributions do not include volunteer services performed, or free use of materials, facilities, equipment or advertising.
Vacation Leave Donations
IRS Notice 2020-46 allows employees to “elect to forgo vacation, sick or personal leave in exchange for cash payments that the employer makes to charitable organizations.” The payments will not be considered taxable wages or compensation if they are made before January 1, 2020 and benefit organizations providing relief to victims of the COVID-19 pandemic.
Retirement Plan Loans and Hardship Distributions
From January 1, 2020 to December 30, 2020, individuals can withdraw up to an aggregate of $100,000 from their employer-sponsored retirement plans, including 401(k) plans, without being subject to the 10% early withdrawal penalty. Income tax on distributions is paid over a three-year period (2020 – 2022) with an option to pay the tax all in 2020. The CARES Act also increased the maximum loan amount up to an aggregate of $100,000 or the individual’s vested balance, whichever is less.
Qualified Disaster Relief Payments
Qualifying disaster relief 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. Qualified disaster payments do not include expenses otherwise covered by insurance reimbursement or income replacement payments.
A qualified disaster is defined in IRC 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, when 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.
Establish a Charitable Organization
Emergency assistance organizers with long-term goals can apply for tax exempt status, but should know that the process takes time and considerable financial resources. Keep in mind that the purpose to provide disaster relief has to cover a broad class of people and cannot be limited to a specific individual, family, or specific group of people, unless the term of the relief program for the specific group of people is indefinite.
Any charity that raises or expects to raise $50,000 or less on an annual basis can apply for exempt status with the IRS using Form 1023EZ rather than the full Form 1023 application (both forms must be filed electronically via pay.gov). Annual reporting is required and failure to do so for a consecutive three-year period results in the revocation of tax-exempt status.
The IRS offers procedures to expedite new applications for organizations seeking to provide disaster relief. If expedited handling is requested the application must be labeled so that it includes an expedited handling request and other specified information. Applications are typically acknowledged within 180 days, but bear in mind the IRS has been subject to the same stay-at-home order as the rest of the country, and processing time may increase.
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. New charities also have to 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.
Additional Recommended Resources:
- Internal Revenue Service https://www.irs.gov/businesses/small-businesses-self-employed/disaster-assistance-and-emergency-relief-for-individuals-and-businesses
- IRS Publication 3833 https://www.irs.gov/pub/irs-pdf/p3833.pdf
- National Council of Nonprofits https://www.councilofnonprofits.org/nonprofits-and-coronavirus-covid-19
If you would like to learn more about disaster relief, please contact your professional advisor at Friedman LLP.