Money makes the world go round – but maybe not in the way you’re thinking.
For every problem in the world, someone is trying to fix it. Many use the for-profit approach; they start a business and try to sell you the solution. Others are working from a non-profit approach; if the gains received aren’t taxable, more money can be spent solving the problem.
The IRS defines non-profits with tax code 501. The most familiar code number for most of us is a 501(c)(3)
“The generally accepted legal definition of “charitable” includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”
But charity and non-profit are not the same. Non-profit means no part of the income can inure for the benefit of the people running it.
Tax code 501(c)(4) refers to social welfare organizations, homeowners associations, and volunteer fire departments, (5) to labor unions, (6) to chambers of commerce.
Contributions to other than a 501(c)(3) are not deductible as a charitable contribution but may be deductible as a business expense. It is important to know the difference.
Contributions to a Go Fund Me account are unlikely to qualify for any kind of deduction.
Now that we know what it all means, what does it actually mean to you?
I recommend having a charitable giving plan established for each year. Know what your contributions are going to be, at least in total, so that you can make a rational decision rather than a heart-based decision as a request is presented.
Whether it is your church, your favorite charity, your niece who sells cookies, or a Go Fund Me for unexpected medical bills for a loved one, having a plan means you should have no guilt saying no and no buyer’s remorse if you say yes. You already know it is within your plan.
Some opportunities to give involve receiving goods or services – only the amount above and beyond the value of the item is deductible for tax purposes. So those Girl Scout cookies you enjoy in the spring unless you never took possession of them because they were being donated, that isn’t a charitable gift. That night out at the fundraiser, if the value of the meal and entertainment is what you paid for Adult Prom, that also isn’t a charitable gift, unless you bought the ticket and then didn’t attend.
From a business standpoint, if you donate an item from your inventory, the only deduction you get is when you value your inventory at the end of the year, and because you gave away an item, its value is less. You don’t also get a write-off for the donation.
Cash giving is the only thing that equals an additional write-off.
One of my pet peeves about charitable giving is the assumption that non-profits should not pay their people well. Working for a charity should not require the executives or employees to be paid less than they would be paid in the public sector. That would only ensure that the best people work for profit-making entities. If we pay great salaries in the charitable sector, we can ensure the best people work there. Putting our thought leaders into charities builds a better world for all. Don’t judge a charity by what their CEO is paid. Judge a charity on the percentage of their income that goes to their programming.
In addition to having an annual plan, consider a charitable giving plan as part of your estate plan as well. Many charities benefit greatly from gifts made when a donor passes.
Giving gifts of stock or art that have appreciated in value is a standard tactic to avoid estate taxes. If you annually make a gift to a specific charity, you may want to set a part of your estate up to continue supporting charities you believe in. The national organizations can usually assist you in the language needed to do that.
If you want to start your own non-profit – there are a number of resources available to you. Consider starting with the IRS Workshops and then follow that up with resources at the National Council of Non-Profits.