Advisors Must Take Care To Deal With Qualified Charitable Organizations
A qualified charity is one that is tax-exempt and is eligible to receive contributions that are tax-deductible to the donor. Because of the tax-favored nature of these qualified charities, the Internal Revenue Service pays close attention to their structure and operation, looking for situations where financial benefits from the operation of the charity inure back to the donor.
Unfortunately, many unscrupulous individuals have tried to hide their business activities and normal living expenses inside the wrapper of a charitable organization, thus attempting to avoid taxes. For this reason, it is important for financial and legal advisors to know which charitable organizations are legitimate, and how these organizations can help meet the social and personal objectives of their clients.
The following are some popular types of qualified charitable organizations, their distinctions and use:
Public Charities: Public charities are sometimes called "50% charities" because contributors are allowed to deduct cash contributions to these charities, up to 50% of the contributors adjusted gross income. When appreciated property is contributed to a public charity, the donation is deductible up to 30% of the donors adjust gross income. Any deduction over the applicable limit can be carried over for up to five additional years. Long-term capital gain property is deductible at its full, fair market value up to the 30% limit, but ordinary income property is deductible at the lower of its fair market value or the donors basis.
Public charities include qualified churches, educational institutions, organizations that benefit certain state and municipal colleges and universities, hospitals, medical research organizations, governmental units, community foundations and publicly supported organizations.
Private (Family) Foundations: Private family foundations are charitable organizations that are established and operated by a single individual or family. These charitable foundations do not meet the public charity requirement of receiving broad financial support from the public. However, they offer the donors family multi-generation control over the investment and distribution of assets within the scope of the foundations charitable purposes.
Cash contributions to private family foundations are limited to 30% of the donors adjusted gross income, and contributions of appreciated property are limited to 20% of adjusted gross income. Contributions of qualified appreciated (publicly traded) stock are deductible to the donor at fair market value. Contributions of all other appreciated property, including closely held stock, are deductible only to the extent of the lesser of the fair market value or the donors basis in the property.
