ELITE ADVISOR BEST PRACTICES

Help Your Philanthropist Clients Start Their Own Charity

Don’t let a lack of available charities stymie your client’s charitable passions (and tax savings opportunities)

By Deepa Venkatraghvan

Key Takeaways:

  • If you have clients who are passionate about a particular cause and there is no charity that supports it, they can start their own charity.
  • Charities can be set up to support overseas causes as well.
  • The process can be time- and resource-consuming—in many cases best reserved for your clients donating $10,000 and above.


Let’s say your client, a U.S. taxpayer, is a philanthropist and is passionate about supporting a particular cause. The only hurdle: There is no existing charity that supports the exact same cause. Well, as a tax advisor, here’s where you can step in to help your client and extend your value. You can advise your client to start his or her own charity.

The good news is that your client can start a charity to support a cause anywhere in the world. There are many charities that are registered in the U.S. that support overseas causes. For instance, Help for Animals India, a charity based in Seattle, was started to help the animals of India. Many alumni groups also set up nonprofit organizations to support the educational institutes at which they studied.

Having said that, while such nonprofit organizations can be formed, the ultimate use of funds is determined by the board of trustees. Under U.S. rules, a domestic charity can’t be committed to give to a particular foreign organization. It can be formed with the intention of supporting a specific organization, but the U.S. board of trustees must make an independent determination that the overseas organization in question qualifies under U.S. rules.

So what does it take for your client to set up his or her own U.S.-based charity, and what should you look out for?

Types of organizations that qualify

According to IRS regs, an organization may qualify for exemption from U.S. federal income tax if it is organized and operated exclusively for one or more of these purposes:

  • Religious
  • Charitable
  • Scientific
  • Testing for public safety
  • Literary
  • Educational
  • Fostering national or international amateur sports competition
  • The prevention of cruelty to children or animals

Examples include:

  • Nonprofit old-age homes
  • Parent-teacher associations
  • Charitable hospitals or other charitable organizations
  • Alumni associations
  • Schools
  • Red Cross chapters
  • Boys’ or girls’ clubs
  • Churches

To qualify, the organization must be a corporation, community chest, fund, foundation or other entity with articles of association. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify.

Set-up process

Step 1: The basics
The basics include:

  • Identifying a cause
  • Selecting a name and checking with the state corporation office to see whether the name is available
  • Formulating the mission statement

Step 2: Incorporation
Your client will need to draw up articles of association and bylaws. The organization must be set up under a state not-for-profit statute. Experts strongly recommend using an attorney experienced in the formation of nonprofit organizations to do this. File the articles of association with the state corporation office.

Step 3: Tax formalities
First the charity would need to get an employer identification number. This is similar to an individual’s Social Security number.

Then your client must apply for federal and state/local tax-exempt status as a private foundation. He or she would need to fill out Form 1023 or 1024, depending on the type of organization.

This is by far the toughest and most expensive part of the process. The form runs up to 26 pages with questions that require detailed answers. All the correct documents must be attached to the application to make sure the process runs smoothly.

The user fee per application is $400 for organizations with gross receipts that do not exceed $10,000 annually over a four-year period and $850 for organizations with gross receipts that exceed $10,000 annually over a four-year period.

Further, it takes about a year to be approved. The organization has to figure out how to operate while it is waiting for approval from the IRS. Most organizations say, “IRS tax-exempt status is pending.” The donor shouldn’t claim a tax deduction until IRS status is approved. Also, the organization needs to understand the documentation rules it must follow when other people give contributions.

Conclusion

All this effort and cost might make sense only for someone who is considering donating amounts upward of $10,000. There is also an ongoing commitment of time and expense to comply with annual filing requirements at both the federal and state levels, so make sure your clients have all their homework in place before getting started. You’ll be glad you did, so that your clients can focus their energies on what they do best—funding causes they believe in, not wrestling with tax rules and regs.


About the Author

Deepa Venkatraghvan, a Chartered Accountant (CPA) from India, is a financial journalist. Currently, she writes for India’s leading publication, www.economictimes.com on tax and financial matters impacting Indians living outside India. You can read her blog on personal finance – Money Happy Returns or follow her articles on Twitter.