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Community Connection
Professional Advisors Edition September 2020
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Advocacy Efforts Accelerate and Expand to Help Communities
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A silver lining of the pandemic and struggling economy is an unprecedented effort by philanthropic leaders to ensure that communities stay supported through fiscal and tax incentives for nonprofits and charitable giving. We encourage you to seek out and share examples of what's going on in the philanthropic sector to help ease the burden of COVID-19. For instance:
- A letter from the Council on Foundations to Congressional Leaders in advance of future relief packages, encouraging the inclusion of provisions to enhance charitable giving, increase support for nonprofits, and help state and local governments.
- A tremendous response from community foundations across the country, encouraging donors to activate donor-advised funds to support causes in the community that can provide immediate and direct assistance to those most affected by the pandemic.
- Increasing interest in mutual aid organizations, which is fueling grassroots response to people in need across the country.
In short, the spirit of philanthropy is alive and well. Sharing this with your clients will help build the momentum and expand the impact of charitable giving during this time of crisis.
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Keep Clients Informed About Stress on the Social Sector
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Peter Drucker once wrote "Only the social sector, that is, the nongovernmental, nonprofit organization, can create what we now need, communities for citizens." Charitable giving is an important component of American society. In 2019, for example, total giving by individuals (including bequests), foundations and corporations reached nearly $450 billion, according to Giving USA 2020: The Annual Report on Philanthropy for the Year 2019, released this summer.
Unfortunately, COVID-19 is taking its toll on nonprofit organizations and philanthropic institutions. In a report recently released by Deloitte's Monitor Institute, the writers offer their predictions for how charities will fare, depending on how the pandemic--and our response to it--play out. Early evidence shows that total 2020 giving will decline significantly. According to the Chronicle of Philanthropy, giving declined six percent during the first quarter of 2020, which translates to $5 billion in lost revenue to nonprofit organizations.
One of the most important ways you can help your clients support the charities they care about is to do everything you can to keep clients informed about the increasing challenges faced by the social sector. We encourage you to reach out to the team at the Community Foundation of Central Illinois to answer questions and provide resources to share with your clients to help them help the causes they love.
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IRS Ruling Helps Employers and Employees Help Pandemic Victims
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In Notice 2020-46, the IRS said compensation treatment will not be triggered when an employer makes cash payments to a charitable organization based on employees' forgoing vacation, personal, or sick days. So-called "leave donation programs" are becoming popular ways for employees to make meaningful contributions to organizations in need. To qualify, an employer's payments must benefit victims in that geographic area, and payments must be made in 2020. The foregone leave won't be treated as gross income to employees. Furthermore, the employer may deduct the payments as a charitable contribution or business expense, if otherwise eligible.
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Advising Clients on Starting a Charity
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As 2020 marches on with little relief in sight from crises affecting our region, more and more attorneys, accountants, and financial advisors are fielding questions from well-intended clients who are exploring starting their own nonprofits to help people in need.
Whether a client's passion is health care access, support for the arts, social justice, or any one of hundreds of other worthy causes, it's critical that you provide counsel regarding the pros and cons of forming a brand new nonprofit.
Here are suggested topics to include in your client discussions:
1. For profit, or nonprofit? Help your client decide whether they really, truly want to start a charity, or whether what they're envisioning would be better structured as a for-profit business. Explain to the client that the rules and tax advantages are different, and so is the way the enterprise is funded. Most charities keep the lights on by securing donations. Businesses keep the lights on by selling goods or services. Either way, you've got to pay employees and run a budget. This seems like common sense and something that any astute client would understand, but sometimes even these basic principles are easy to overlook when enthusiasm for a cause takes over.
2. The state and the Feds. Explain to the client that if they do decide to start a new charity, just like a business, it still requires setting up a legal entity. Unlike a for-profit business, though, to qualify as a tax-exempt nonprofit, the client will need to apply to the Internal Revenue Service for an exemption under Section 501(c)(3). This exemption is what allows the organization to be free from paying income tax, and it also allows people to donate to the organization and be eligible for a tax deduction on their own tax returns. Again, these rules seem like Charity 101 material, but never assume your client is in the know.
3. Sell, sell, sell. Most people who start a charity are passionate about a cause and probably already have programs in place or in mind to help others. The trick, though, is to get out there and share the news about the cause to raise money. Your client needs to be aware that starting a new charity involves "sales," just like a for-profit enterprise, except they most likely will be asking for donations to support their good work instead of selling goods or services like a for-profit business. Certainly nonprofits can generate earned income, but most organizations also should be designed to receive public support in the form of grants and contributions to avoid certain tax rules, such as those prohibiting excess "unrelated business taxable income."
4. Verify the unmet need. Finally, and perhaps most importantly, encourage your client to research whether there are any existing organizations that are already serving the mission your client intends to fulfill. Indeed, during challenging economic times such as these, best practices suggest that two or more nonprofits combining their efforts is a good way to create efficiencies and ensure more effective service delivery to people in need.
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Weeding Out Taxpayers Who Abuse Conservation Tools
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As environmental consciousness continues to rise, so does the subject of conservation easements as a tax-savvy charitable giving tool. Perhaps your clients have even explored this vehicle, which involves the client giving up certain rights to the ability to alter a tract of land, with the intent to preserve the land indefinitely. The reason this transaction creates a charitable gift is because the easement typically results in a lower property value because the parcel's usefulness for commercial purposes is eliminated or drastically reduced.
Conservation easements are not new. A resource called the National Conservation Easement Database provides mapping and information related to all conservation easements in the United States, which as of 2018 totaled 130,000 in number and covered nearly 25 million acres of land.
Unfortunately, conservation easements can be the target of abuse by unscrupulous taxpayers seeking to undermine the Internal Revenue Service's strict parameters for deductions and tax benefits generated from the grant of a conservation easement. This abuse has caught the attention of lawmakers. On August 25, 2020, Senate Finance Committee Chairman Chuck Grassley and Ranking Member Ron Wyden released a report on the findings of investigations into a few "bad actors" who, they believe, are circumventing the rules and thereby reducing federal tax revenue to the tune of billions of dollars.
The report is a must-read if you have clients who are involved in conservation easements or are considering using this planning vehicle.
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