When private foundations disburse out funds to other organizations, it is important to make sure that donations are going to IRS-qualified organizations to minimize the net investment income tax assessed. Even when the funds are going to support a cause that seems charitable in nature, not all distributions of funds are considered qualifying distributions by the IRS. Read on to learn more about four instances when contributions to an organization may not be qualifying distributions.
Choosing an Organization
In general, when distributing funds to another organization, the easiest way to ensure that a donation will be a qualifying distribution is to donate your money to a public charity registered as a 501(c)(3) organization. If you’re unsure which organizations qualify as a 501(c)(3) public charity, the IRS and the California Attorney General’s Office have provided handy ways to search for tax-exempt entities. By using this search page on the IRS website or this search page on the California Attorney General’s Office website, you can look up any exempt organization and determine whether it is registered as a public charity.
Organizations to Beware Of:
1. Crowdsourcing Websites
Donations made online through websites like Kickstarter, GoFundMe, or YouCaring are generally not qualifying distributions because they are not made to a 501(c)(3) public charity. Unfortunately, though supporting altruistic causes such as helping a family after tragedy strikes or funding a park clean-up effort, they are still not considered qualifying distributions in the eyes of the IRS.
2. Foreign Charities
An organization must have been created under the laws of either the United States, any individual state, or any United States territory to qualify as a 501(c)(3) public charity. If a charity operates abroad, it must still have been formed within the United States for donations to be qualifying distributions. Thus, a donation to the American Red Cross would be a qualifying distribution while a donation to the British Red Cross would not.
3. Political Recipients
Contributions to politicians or political organizations are not qualifying distributions. The IRS specifically excludes donations made for the benefit of a politician or a political agenda from being qualifying distributions. In addition, the IRS states that private foundations are “absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) a candidate for public office.” Any private foundation found to have violated this rule may lose its tax-exempt status and/or be subject to certain excise taxes.
4. Other Private Foundations
When making a contribution from one private foundation to another, the donor must take certain additional steps to certify that the money is going to support a qualified charitable purpose. The donor private foundation must make inquiries to determine that the private foundation receiving the funds can be trusted to spend the grant money only for the purpose for which the grant was made. A written grant agreement must be signed by both the donor and donee private foundation and the donee private foundation must submit reports to the donor on how it is using the grant money.
It is not always clear if a donation made in the spirit of charity will actually be deductible under the tax code. These are just a few scenarios where a contribution may not be a qualified distribution. If you are having trouble determining whether a donation you would like to make would be tax-deductible, please do not hesitate to contact your L&B professional at (858) 558-9200.