According to Giving USA, in 2017 Americans contributed $410.02 billion to charity, crossing the $400 billion mark for the first time. Giving by individuals totaled an estimated $286.65 billion and $45.89 billion was gifted to foundations.
There are over 1.5 million charitable organizations in the U.S., predominantly public charities and private foundations. A public charity receives most of its support from the general public. A private foundation, on the other hand, usually receives its support from one source – an individual, family, or corporation.
The primary activity of a private foundation (as opposed to a private operating foundation) is the making of grants to other non-profit organizations, primarily public charities since a private foundation cannot generally be the recipient of contributions from other private foundations.
A charitable organization, whether it be a public charity or private foundation, is established by forming an entity, often a trust or a not-for-profit corporation. But that is only the beginning. After the entity is formed, it must file an application with the Internal Revenue Service (IRS) in order to obtain a determination that the organization is tax-exempt, i.e., that a donor is entitled to an income, gift or estate tax charitable deduction and that the income of the organization (interest, dividends, capital gains, etc.) is free of income tax.
Once the organization is granted a tax-exempt status that status needs to be carefully maintained. The organization will require due diligence in its operations. The assets of a tax-exempt organization cannot benefit private persons and strict requirements apply when an organization provides scholarships and charitable grants. Private foundations particularly are subject to stringent rules regarding transactions between the foundation and those deemed to be “disqualified persons,” e.g., those making substantial contributions to the organization and those managing it and, by extension, members of their families.
Not to be overlooked is the requirement of the organization’s providing a written acknowledgment of any contribution of $250 or more in order that the donee receives an income tax charitable deduction. A simple thank you is not enough; the acknowledgment must contain specific language to ensure that the income tax deduction will be allowed. This substantiation requirement is applicable to all charitable contributions, including those to a private foundation.
Finally, the organization is required to make annual filings with the IRS and with the states where it operates. In a number of states, including New York, California, New Jersey, and Connecticut, the Attorney General oversees charitable organizations. The Attorney General in Georgia represents the interests of the beneficiaries of a charitable trust in all legal matters relating to the trust.
A failure to file with the IRS for three consecutive years can result in the automatic revocation of your tax-exempt status; i.e., the income to the organization will be subject to income tax and contributions will not be tax deductible. All may not be lost however; reinstatement of tax-exempt status may be possible if the organization meets certain criteria.
A charitable organization can accomplish any number of good works, but in order to do so, it requires careful attention to its formation, funding, and maintenance. These tasks can be accomplished by attorneys, accountants, and other professional advisors. The philanthropic vision, however, rests with the founder and those closely associated with the organization.
For more information about charitable organizations and tax-exempt status, please contact your Trusts and Estates counsel at Smith, Gambrell & Russell, LLP.