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Charities & Taxes

Issue

How does your charity file taxes and qualify as a charity that can receive 50% limit contributions?

Analysis

Source: IRS Publication 557

Filing requirements

Charities will remain exempt from filing an annual information return as long as they normally have less than $50,000 in gross receipts. Other charities that are exempt include a church and most church-affiliated organizations, an exclusively religious activity of any religious order, a governmental unit or an affiliate of a governmental unit, a 501(a) private foundation, and a political organization that is a state or local committee of a political party or local candidate.

These charities are required to file a Form 990-N, Electronic Notice (e-Postcard). This can be done online.

If you do not fall under any of these categories, you must file a Form 990, annual information return.

Maximum contribution

In order to be able to donate up to 50% of AGI, the charity needs to be one of the following:

  • Church or association of church
  • Educational organizations with a regular faculty and curriculum
  • Hospitals and come medical research organizations
  • Organizations that manage property for state and municipal colleges
  • Publically supported charity
  • Private operating foundation
  • A private foundation or private nonoperating foundation which distributes all contributions within 2½ months following the year in which the contribution was received.

The first three are very straightforward:

In order to qualify as a public charity, the charity must meet either:

  • The One-Third Support Requirement

OR

  • The Ten-Percent-of-Support Requirement, and
  • The Attraction of Public Support Requirement

To determine whether 1/3 or 10% of support contributed comes from the public, use the following formula:

Direct or indirect contributions received from the general public

Total contributions received

The requirement states that you will qualify as meeting the one-third support test or the Ten-Percent-of-Support Requirement for its current tax year and the next tax year if for current year and prior four years, the organization meets the requirement on an aggregate basis.

When you do meet the requirements, it qualifies you for two years. Then you must requalify with the new five-year period.

So to be clear, no single year can qualify or disqualify you, but the five year period including the current year is what is important.

If you cannot continue to qualify as a public charity, there are three other classifications that would allow you to deduct charitable contributions up to 50% of you AGI.

Private Operating Fund

There are two parts to qualifying as a private operating fund.

The first is to pass one of three tests:

  • The assets test
  • The support test
  • The endowment test

To meet the assets test, at least 65% of the foundation’s assets must be a combination of the following:

  • Assets devoted directly to the active conduct of its exempt activity and/or a functionally related business
  • Stock of a corporation that is controlled by the foundation (at least 80% of total voting power 80% of total other shares) and the at least 85% of the corporations assets are devoted directly to the active conduct of its exempt activity and/or a functionally related business

To meet the support test, you must meet three requirements:

  • At least 85% of support is normally received from the general public and five or more unrelated exempt organizations
  • Less than 25% of its support is normally received from any one exempt organization
  • Less than 50% of its support is normally received from gross investment income

To meet the endowment test, a foundation must normally make qualifying distributions of at least 2/3 of its minimum investment return directly for the active conduct of its exempt function. The minimum investment return is 5% of the excess of FMV of all assets not used directly in conduct of its exempt purpose divided by the amount of indebtedness incurred to acquire those assets.

If you meet one of the three tests above, you must also make qualifying distributions of at least 85% of Adjusted net income or minimum investment return(whichever is less) directly for the active conduct of foundation’s organized activity.

Private Nonoperating Foundation

100% of contributions must be used to make qualifying distributions by March 15th of the year after they are received.

Private Foundation

100% of contributions must be pooled into a common fund and be distributed by March 15th of the year after they are received.

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