Traditionally, when a group or an individual wanted to form an entity to carry out a project with a charitable purpose which would not be subject to federal income tax and to which federally tax-deductible charitable contributions could be made, they formed a nonprofit corporation. Then, the corporation would apply to the Internal Revenue Service (“IRS”) for a Determination Letter which affirms that the corporation is nontaxable for federal income tax purposes and can receive federally tax-deductible contributions. This route has become very expensive, however, with the application to the IRS now having a fee of from $250.00 to $2500.00 and legal fees for the incorporation, completing the application, and completing state charitable solicitation registration forms.
An alternative is sponsorship by an existing organization which already has an IRS Determination Letter and has made an appropriate state charitable registration. In that situation, the tax-exempt entity is, and the contributions are, to the sponsoring organization for the project purpose. This can be a difficult task because the purpose of the sponsored entity must match the IRS approved purposes of the sponsoring organization. A solution may be having as sponsor a community foundation which is organized for broad charitable purposes.
Understanding what qualifies as a charitable purpose when working with a community foundation is critical to ensuring that projects receive tax exempt status while donors receive the available incentive tax benefits.
Judicial decisions have provided further clarity on exactly what types of projects can be considered charitable. Some of those projects that are able to qualify include those that focus on helping poor or underprivileged individuals, advancing religion, building or maintaining public buildings or monuments, and lessening governmental burdens. Furthermore, projects centered on promoting social welfare qualify when they aim to accomplish better neighborhood relations, eliminate discrimination, defend civil rights that have been established under the law, or reduce juvenile delinquency and the deterioration of communities.
Care must be taken also to see that the charitable purpose is to serve a public rather than a private interest. It is necessary, for example, that a project demonstrate that its purpose is not to benefit a private interests such as designated individuals, the creator or his or her family, organizing committee members, or persons controlled, directly or indirectly, by such private interests.
Judicial opinions have also provided insights into those explicit categories of purposes that do not provide grounds for tax exemption. For instance, action organizations do not qualify. Projects which are action organizations devote a substantial part of their activities to attempt to influence legislation using propaganda or other means. Projects are also action organizations when they participate or intervene in any way with political campaigns for or against a public office candidate. On the other hand, when a project regularly contacts or urges the public to contact the legislature with the hopes of influencing legislative outcomes, or when a project simply advocates for adoption or rejection of certain pieces of legislation, it is not considered an action organization.
In summary, if organizations or individuals who are trying to implement projects for charitable purposes, then there is a less expensive way to become federally tax exempt and able to accept federal tax-deductible contributions than forming a non-profit organization. As long as the project’s pursuits qualify as strictly charitable endeavors, as described under Treasury Regulation 1.501-1(c)(3)(d), organizations or individuals are able to provide tax benefits to donors and support to the community as projects of community foundations.
With contribution from Angela Mauroni, first year J.D. candidate at the University of Pittsburgh School of Law