Donor advised funds for business charitable giving
No matter how big or small, many of today’s businesses look to reinvest in the community by donating to charitable organizations. Unfortunately, restrictions and legal issues have made donating increasingly difficult. While many businesses invest in their communities by giving to charitable organizations, they are often inundated with requests for contributions. This can result in an unfocused program of charitable giving and significant administrative expense. Some companies may be unable to budget a consistent flow of charitable dollars. Recently, some businesses have discovered that giving through non-permanent donor advised funds is an easy and more beneficial way to make charitable donations.
By establishing a non-permanent donor advised fund at a community foundation, businesses can simplify and focus the giving process. The way it works best is with a C-corporation. Such a corporation, using accrual accounting, establishes a non-permanent donor advised fund at a community foundation. Within three and one-half months after the end of its tax year, it donates up to ten percent of its net profits to the foundation for the fund. The amount can vary from year to year with the profitability of the corporation, but still provides a steady source of funding for charitable giving. The community foundation handles the administrative paperwork, check writing, investment and grantmaking at a low cost.
What are Donor Advised Funds?
Donor advised funds have been around almost as long as community foundations. Donors find this type of fund to be an advantageous way to make charitable contributions and stay in the grantmaking process. With donor advised funds, the donor, or an advisory committee chosen by the donor, recommends grants to be made to nonprofit organizations or governmental entities. Because donor advised funds could be subject to abuse, treasury regulations require that proposed grants meet community foundation criteria and that the foundation considering the recommendations may not be bound by them.
The traditional type of donor advised fund is an endowment from which only income can be used for grants. A non-permanent donor advised fund makes both principal and income available for grants allowing maximum flexibility in making contributions where the level of profitability of a business is uneven. Even though contributions are not made regularly or in even amounts, the fund can sustain a measured and constant level of grantmaking. Most community foundations have an initial contribution requirement, $10,000 for example, but then make all the principal and income available for grants.
An Alternative to a Private Foundation
Sometimes, a business wants to set up a private foundation to make irregular, affordable charitable contributions and still make systematic grants to charitable organizations. Non-permanent donor advised funds are an alternative to such private foundations. As laws applicable to private foundations make it more difficult for such organizations to qualify for tax exemption and complicate their administration, donor advised funds become even more attractive to prospective donors. If a business is considering establishing a private foundation to carry out charitable interests, it should consider establishing a non-permanent donor advised fund at a community foundation instead, because these funds offer several advantages over private foundations.
Donor advised funds are component funds of a community foundation, meaning the funds can be an immediate means of providing a vehicle for tax deductible charitable donations without the lengthy establishment time for organizing a private foundation and having its ability to receive tax deductible contributions recognized by the Internal Revenue Service. Instead of having to organize a nonprofit corporation and filling out a lengthy application for federal tax exemption, all that is necessary to establish a donor advised fund at a community foundation is the signing of a short agreement.
Businesses that create private foundations frequently struggle with long-term governance questions. With a donor advised fund at a community foundation, succession is addressed in advance. For a business, the non-permanent donor advised fund can continue as long as the business continues. When the business dissolves the fund can continue as an unrestricted, restricted or area of interest endowment fund with only income used for grants.
What are the Tax Advantages of Non-permanent Donor Advised Funds?
As previously indicated, contributions to non-permanent donor advised funds can be tailored to match the charitable giving capacity of a business. When the fund is at a community foundation, there is instant recognition by an IRS auditor that contributions qualify for a federal tax deduction. This may or may not be the case with all organizations seeking charitable donations. By making a contribution to the community foundation, and then having the grants come from the community foundation, the responsibility for determining tax deductibility of the grants is shifted to the community foundation.
Donor advised funds offer significant tax benefits over private foundations. The difference is especially significant with contributions of appreciated property (other than publicly traded securities). For instance, contributions of the stock of a closely held subsidiary to private foundations are deductible only at the donor’s cost basis. However, contributions of such stock to a donor advised fund at a community foundation are deductible by the donor at their current fair market value. This difference can result in substantial tax savings to the donor.
The Internal Revenue Code imposes an excise tax on the net investment earnings of private foundations. This tax amounts to either one or two percent of net investment earnings, depending on the foundation’s distribution pattern. A community foundation’s funds are not subject to the excise tax. Private foundations are required to distribute five percent of their net investment assets each year while community foundations are not. Therefore, a business and a community foundation can agree to “grow” a donor advised fund by reinvesting earnings in anticipation of making larger grants. The Internal Revenue Code also provides strict limits on the amount of stock that can be transferred to a private foundation by directors or donors of a private foundation. A community foundation is not subject to these limits. This allows donors who are major shareholders of their companies to make more tax-advantageous gifts.
Foundation Funds as Alternatives to Commercial Charitable Funds
In recent years, commercial financial entities, such as Fidelity and Vanguard, have begun offering charitable funds to their customers. These commercial products operate very much like community foundation non-permanent donor advised funds. Grants from both the commercial product and non-permanent donor advised funds can be made to any charitable organization described in Sections 501(c)(3) and 170(c) of the Internal Revenue Code, wherever located. However, there are certain differences that can be significant to a business interested in providing local charitable support. First of all, a community foundation is local and run by people who live in the community. The impact of participation in the community by grants to local charities is enhanced by an initial large grant to an organization, which is itself local. Another major difference is the charitable grantmaking expertise concerning community needs available at community foundations and offered to businesses that start donor advised funds with them as part of administering those funds. Unlike its commercial competitors, a community foundation can assist in suggesting worthy and effective organizations in the area of giving in which the business has an interest.
Donor Advised Funds: Simple and Effective
Because of the administrative economies inherent in making one annual contribution and grantmaking from one fund, more of a business’s charitable giving can be channeled to charitable grants. Non-permanent donor advised funds at community foundations are a simple and effective way for a business to make charitable contributions. A non-permanent donor advised fund enables a business to make maximum use of its federal charitable tax deduction and, at the same time, be a sustainable source of continuous support for charities, especially local ones, in which the business has an interest.