Did your favorite non-profit just lose its tax exempt status?



Please giveNon-profits are formed all the time to advance a purpose to better the world or support a cause.  While the philanthropic goals are wonderful. the record-keeping behind them is often spotty or non-existent. The result of bad record keeping?  The IRS has just revoked the tax exempt status of 275,000 charities nationwide, 7800 of which are here in New Jersey. (Look at the list here to see if your favorite non-profit no longer is one)

By way of background, it used to be that small charities didn't have to file a federal income tax return.  That was changed starting in 2007, when all charities became required to file a Form 990-N.  The deadline for all those filings was October 15, 2010.  For any non-profit that didn't file, their tax exempt status was just pulled by the IRS.

What does this mean to the charity?  If they aren't tax exempt, then they need to start paying state sales tax on purchases, and file/pay income tax on earnings.  The IRS does have a reinstatement procedure in place for small charities with annual gross receipts of $50,000 or less in 2010. Per the IRS website “The relief allows eligible small organizations to regain their tax-exempt status retroactive to the date of revocation and pay a reduced application fee of $100 rather than the typical $400 or $850 fee. Full details are available in Notice 2011-43, Notice 2011-44 and Revenue Procedure 2011-36, issued today”

What does this mean to you, a supporter of the charity? Well, any contributions that you make are no longer deductible on your income taxes. If you report the deduction, and then the IRS says that your non-profit isn’t a charity, you could owe additional income taxes, with interest and penalties.




Non-Profits - Pay Attention - You could lose your tax exempt status on October 15

Calling all non-profits - Act NOW or lose your tax exempt status.  

The bad news - any non-profit that has not filed its income tax return Form 990-N by October 15, 2010 will lose its tax exempt status and need to reapply.

The good news - you still have time to fix the problem.  You can file the Form 990-N electronically for tax years 2007, 2008 and 2009 on or before October 15, 2010 and keep your tax exempt status.  You must file for all 3 years if you have been in existence that long and this offer expires on the 15th.

Our colleagues at Sax Macy Fromm & Co., CPA's have sent around a newsletter describing the issue for non-profits.  

The scariest part - over 9000 New Jersey non-profits are at risk.  Click here to see if you are on the list.

America's Billionaires are Giving it Away

 2010 is the year of no estate tax.  It only goes to follow that the wealthiest of all Americans are rejoicing that they need not share their wealth with others, and can go back to counting their coins without worry about the government asking for their share, right?  Wrong.  It turns out that "34 Billionaires Are Giving Half of Their Fortunes Away" according to Time Newsfeed.

A a few week ago Bill Gates and Warren Buffet announced that they were going to solicit the very exclusive club they belong to, America's Billionaires, to donate at least 50% of their fortunes to charitable causes during their lives or after their deaths through The Giving Pledge.  The Giving Pledge is described as an effort to "invite the wealthiest individuals and families in America to commit to giving the majority of thier wealth to philanthropy."  You can even view pledges to see who has made the pledge so far.  Some names you will recognize

  • Michael Bloomberg
  • Warren Buffet (who is leaving 99% of his wealth to charities)
  • Dian Von Fursetnberg
  • Bill and Melinda Gate
  • Barron Hilton
  • George Lucas
  • Ted Turner

You can even see what has motivated these people who have been blessed with success to give back.. George Lucas' passion is educational innovations.  Michael Bloomberg believes that "by giving, we inspire others to give of themselves, their money or their time."

Within the estate tax code has always been the concept that you can give it in taxes, or give it to charity.  Charitable gifts are not subject to tax.  The acts of these individuals inspires me to think "Why don't more people take charge of where their money is going on death and instead of leave it grumbling to the government, leave it to cause you believe in?."   Think of all the change if The Giving Pledge was not limited to only America's billionaires?  The Giving Pledge has inspired me to have more through discussions with my clients about trading tax dollars for philanthropy.



Charitable Remainder Trust - Give your tax dollars to charity instead

Jensen Law Offices has a great post summarizing the mechanics and usefulness of a Charitable Remainder Trust or CRT.  A CRT is one of those great tax techniques where you get to have your cake and eat it too.  

A CRT is a split gift between a charity and your family.  For example - you leave a portfolio in a trust where your children get 7% a year for their lives, and when the child dies, the charity gets the balance of the portfolio.  Your estate is entitled to a tax deduction (since NJ still has an estate tax, this is relevant in 2010 as well as 2011 and beyond when the federal estate tax reappears).  Your children get an income stream for live, and the charity has the reminder upon their deaths.

Note that when you have a taxable estate charitable giving at its most basic is taking dollars that your family would not have gotten anyway (because they had to go to taxes) and directing them to charity. With a CRT you are compounding this by getting the tax benefits and giving the family a stream of dollars.


Image: Salvatore Vuono / FreeDigitalPhotos.net

Charitable Deduction from an Estate?

A great answer to a frequently asked question when handling a loved ones estate was recently posted by taxgirl.com.

Here is the situation - Grandma wanted to give $10,000 to the ASPCA.  She told everyone in the family, but didn't put it in her Will. Can the deduction for a charitable contribution still be made?

Like all good questions - the answer is yes and no (isn't the law great?).  Taxgirl summarizes the issues nicely:

Here’s the unhappy rule: if a charitable donation is not specifically authorized in a will or trust, the estate may not properly take a deduction for the donation. <snip>

However, there is some light at the end of the tunnel. Individuals may properly donate items which pass to them from an estate and claim a charitable deduction on their personal return. 

So what to do.  Well, you could take $10,000 from your share of the estate and donate it to charity. Grandma's wishes would be honored, and you would be able to take the deduction on your personal tax return. If there are 4 beneficiaries, each could donate $2500 in her honor.

What if the item to be donated isn't cash, but stuff?  For example, donating all of Grandma's furniture and household items to charity? In that case the best idea is to value the property (have a personal property appraiser come in), distribute the property to the beneficiaries, and then the beneficiaries can take the charitable deduction on their tax returns.  Note that there is not a requirement that the beneficiaries physically take ownership of the property - the property could be transferred to the beneficiaries via an assignment and then all the personal property picked up by the charity at the house.

Charities as Victims of Cash for Clunkers?

Are Charities going to be Victims of Cash for Clunkers asks Kay Bell of Don't Mess With Taxes.

The Cash for Clunkers program (officially CARS for  Car Allowance Rebate System ) has been hugely popular. Old gas guzzlers are being traded in for new cars that have a $4500 rebate.  An additional $2 billion was added to the program last week.

Quick Aside - $2 billion is the same as $2,000,000,000.00 - ALWAYS write out the zeros when talking about how the government is spending YOUR dollars - looks quite a bit larger now, doesn't it?  At $4500 a car, that is 44,444 additional new cars being purchased.

The program requires that the "Clunkers" are junked by having liquid silicate poured into the engine, so that it is irreparably destroyed.  These cars will then be sold for scrap (and I won't go into the pros and cons of the environmental effects of that).

The problem?  Many charities rely on donations of old cars as an ongoing revenue source.  For example, Bell says:

Animal Services of Thurston County, Wash., depends on up to $20,000 in donations each year from Northwest Charity Donation Service. The service, in turn, relies on donated cars.

But since the Cash for Clunkers program began this summer, the nonprofit's source of funding is drying up, reports King 5 News in Seattle.

These are the same charities that have already lost scores of other funding sources as a result of individuals reducing contribution due to the stock market drop, corporations redlining excesses in the budgets due to the recession, and foundations staggering under market and Madoff type unanticipated losses.  So, score 1 for the car industry, and another negative for the charities that are using private dollars to address some of the staggering needs of the less fortunate.