Charitable Organizations Providing Disaster Relief
Charitable Organizations Providing Disaster Relief - Tax Advantages & Tax Laws
Many charitable organizations desire to assist victims of disasters or those in emergency hardship situations, such as the victims of Hurricane Harvey.
Providing aid to relieve human suffering caused by a natural or civil disaster or an emergency hardship is charity in its most basic form. Charitable organizations, including churches, are frequently able to administer relief programs more efficiently than individuals acting on their own.
There are tax advantages when a charitable organization provides relief. When an organization is exempt from federal income tax, more of its resources are available to provide relief. Contributors to qualified charitable organizations may be eligible to claim tax deductions for their donations, and the value of these contributions is not subject to gift tax, regardless of the amount. Also, individuals receiving assistance are not generally subject to federal tax on the value of assistance they receive from a charity to meet their personal needs.
HELPING THROUGH AN EXISTING CHARITABLE ORGANIZATION
When a tragic event occurs there is often an overwhelming desire on the part of the community to come to the aid of the victims. In the immediate aftermath of a disaster or emergency, those who wish to provide help may overlook existing charities and spend precious time and resources establishing a new charitable organization.
It may be more practical to combine resources with an existing charity to provide immediate relief, or see whether an existing charity operating in a related area may be interested in establishing a special program to address a particular disaster or emergency hardship situation. Community-based organizations and charities with a local presence often know best what assistance is needed and understand the social and cultural context of a disaster. Working with and supporting these existing organizations may prove to be a more efficient use of disaster relief resources.
Federal Tax Law
Under federal law, an existing qualified charity generally must be given full control and authority over the use of donated funds, and contributors may not earmark funds for the benefit of a particular individual or family. Contributions to qualified charities may, however, be earmarked for flood relief, hurricane relief or other disaster relief.
State Law Considerations
Many state and local authorities that regulate charitable solicitation rules have imposed regulations that provide that if a charity represents that funds will be used for the relief of the victims of a particular disaster, the funds may not be used for other programs of the organization.
ESTABLISHING A NEW CHARITABLE ORGANIZATION
When no existing charity appears to have the capability to carry out an effective disaster relief or emergency hardship program, or when the potential organizers of the charity have long-term goals extending beyond the immediate crisis, it may be appropriate to consider establishing a new charitable organization. An organization qualifies as an exempt charitable organization if it is organized and operated exclusively for charitable purposes, serves public rather than private interests, and refrains from participating or intervening in any political campaign or engaging in substantial amounts of lobbying activity.
A new disaster relief or emergency hardship organization may request expedited handling of its application for exemption. An application will not be expedited simply because the organization may serve disaster victims. The organization must demonstrate that it is meeting an immediate need of disaster relief or emergency hardship victims and that its ability to provide immediate assistance to such victims will be adversely impacted in a material way if the application is not reviewed expeditiously. Requests for expedited handling are infrequently approved, and even if consideration of the application is expedited, there is no guarantee that tax-exempt status will be granted.
If you or your organization desires to form a new charitable organization, please contact our office.
HOW CHARITABLE ORGANIZATIONS HELP VICTIMS
Aid to Individuals
Organizations may provide assistance in the form of funds, services, or goods to ensure that victims have the basic necessities, such as food, clothing, housing (including repairs), transportation, and medical assistance. Disaster relief organizations are generally in the best position to determine the type of assistance that is appropriate.
Aid to Businesses
Disaster assistance may also be provided to businesses to achieve the following charitable purposes:
• to aid individual business owners who are financially needy or otherwise distressed,
• to combat community deterioration, and
• to lessen the burdens of government.
An exempt charity can accomplish a charitable purpose by providing disaster assistance to a business if:
• the assistance is a reasonable means of accomplishing a charitable purpose, and
• any benefit to a private interest is incidental to the accomplishment of a charitable purpose.
Once a damaged business has been restored to viability or a newly attracted business is self-supporting, further assistance from a charity is no longer appropriate. Charities that aid businesses should have criteria and procedures in place to determine when aid should be offered and discontinued.
The group of individuals that may properly receive assistance from a charitable organization is called a “charitable class.” A charitable class must be large enough or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance. For example, a charitable class could consist of all the individuals in a city, county or state. Such a charitable class is large enough that the potential beneficiaries cannot be individually identified and providing benefits to this group would benefit the entire community. Donors may not earmark contributions to a charitable organization for a particular individual or family.
Needy or Distressed Test
Generally, a disaster relief or emergency hardship organization must make a specific assessment that a recipient of aid is financially or otherwise in need. Under established rules, charitable funds cannot be distributed to individuals merely because they are victims of a disaster. An organization’s decision about how its funds will be distributed must be based on an objective evaluation of the victims’ needs at the time the grant is made. The scope of the assessment required to support the need for assistance may vary depending upon the circumstances.
Short-Term and Long-Term Assistance
Often charitable organizations (or programs of existing charities) are established as a result of a particular disaster where both short-term and long-term assistance might be required. The following types of assistance, if based on individual need, would be consistent with charitable purposes:
• assistance to allow a surviving spouse with young children to remain at home with the children to maintain the psychological well-being of the family,
• assistance with elementary and secondary school tuition and higher education costs to permit a child to attend school,
• assistance with rent, mortgage payments or car loans to prevent loss of a primary home or transportation that would cause additional trauma to families already suffering, and
• travel costs for family members to attend funerals and to provide comfort to survivors.
A charitable organization must maintain adequate records to show that the organization’s payments further the organization’s charitable purposes and that the victims served are needy or distressed. Charities must also maintain records to show they have made distributions to individuals after making appropriate needs assessments based on the recipients’ financial resources and their physical, mental, and emotional well-being.
Generally, documentation should include:
• a complete description of the assistance provided,
• costs associated with providing the assistance,
• the purpose for which the aid was given,
• the charity’s objective criteria for disbursing assistance under each program,
• how the recipients were selected,
• the name, address, and amount distributed to each recipient,
• any relationship between a recipient and officers, directors, or key employees of, or substantial contributors to, the charitable organization, and
• the composition of the selection committee approving the assistance.
Documentation of Short-Term Emergency Aid
A charitable organization that is distributing short-term emergency assistance would only be expected to maintain records showing the type of assistance provided, criteria for disbursing assistance, date, place, estimated number of victims assisted (individual names and addresses are not required), charitable purpose intended to be accomplished, and the cost of the aid. Examples of such short-term emergency aid would include the distribution of blankets, hot meals, electric fans, or coats, hats and gloves. An organization that is distributing longer-term aid should keep the more-detailed type of records described above.
If a public charity carries on disaster relief activities as one of its three largest programs, it must describe the services provided in the Statement of Program Service Accomplishments on IRS Form 990 or Form 990-EZ. A public charity also may be required to complete Schedule I for grants or other assistance to individuals.
Similarly, if a private foundation carries on disaster relief activities as one of its four largest programs, it must describe the services provided in its summary of direct charitable activities on IRS Form 990-PF.
INCOME TAX TREATMENT OF QUALIFIED DISASTER PAYMENTS
Internal Revenue Code section 139 provides that qualified disaster (as defined in section 139) relief payments from any source, including employers, reimbursing or paying individuals’ specified expenses in connection with qualified disasters are not taxable as income and are not subject to employment taxes or withholding.
Qualified disaster relief payments include payments received (regardless of the source) for the following expenses:
• reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,
• reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a qualified disaster (a personal residence can be a rented residence or one you own), and
• reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a qualified declared disaster.
Qualified disaster relief payments do not include:
• payments for expenses otherwise paid for by insurance or other reimbursements, or
• income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation
Talk to a Nonprofit Attorney About Your Charitable Organization Providing Disaster Relief
For additional information regarding a charitable organization providing disaster relief, please see IRS Publication 3833. If you have questions regarding your nonprofit organization providing disaster relief, please contact the nonprofit lawyers at Henderson, Caverly & Pum, LLP at the button below.