Tag Archive for: 501c3

Taxpayers and Nonprofits Can Have Their Cake and Eat It Too

The increase of the standard deduction under the Tax Cuts and Jobs Act of 2017 (the “TCJA”) is predicted to have a substantial impact on charitable giving. The TCJA doubles the standard deduction for individuals from $6,350 to $12,000, for couples from $12,700 to $24,000, and for heads of household from $9,350 to $18,000.  The increase will discourage most taxpayers from itemizing. When itemizing, taxpayers receive charitable tax deductions for donations made to nonprofits but when taxpayers choose the standard deduction, they are unable to receive any tax benefits for charitable donations. With more taxpayers choosing the standard deduction, taxpayers could be less incentivized to make donations.

The American Enterprise Institute reported there will be a $17.2 billion reduction in charitable donations this year.  The reduction in donations will hinder the ability of nonprofits to carry out their charitable missions.  However, studies like this tend to focus on more traditional charitable giving.  For those who are willing to put in a modest amount of effort, many planning opportunities remain. Taxpayers and nonprofits can still have their cake and eat it too.


Two planning opportunities any taxpayer can explore are “bunching” and a Donor Advised Fund.  Bunching is when a taxpayer combines several years’ worth of their charitable donations and donates the collective amount in one year. For example, an individual taxpayer makes a $10,000 donation each year to a nonprofit. With the increase of the standard deduction, the taxpayer will choose the standard deduction, and not be able to realize a tax benefit from his or her $10,000 donation.  However, if the taxpayer were to bunch three years of his or her $10,000 donations into one lump sum, the taxpayer could make a $30,000 donation and exceed the new standard deduction threshold. By exceeding the new threshold, the taxpayer will be able to itemize his or her charitable donation and realize a tax benefit.

Donor Advised Fund

A Donor Advised Fund (a “DAF”) is another planning opportunity for taxpayers. A DAF is a separately identifiable account which holds irrevocable donations by a donor and is managed by a section 501(c)(3) organization. The use of a DAF is similar to bunching. With both options, a taxpayer makes a lump sum donation in one year to exceed the new standard deduction threshold and realize a tax benefit.  However, a DAF offers additional benefits. A DAF allows the donor to retain advisory privileges on how the funds should be distributed and invested.  As a result of those privileges, a donor may choose to distribute his or her donation to a nonprofit or nonprofits over several years. For example, a taxpayer makes the bunched $30,000 donation to his or her DAF account. A taxpayer can choose to advise the 501(c)(3) organization managing the account to make his or her traditional $10,000 donation to a nonprofit for the next three years. Donations in a DAF grow tax-free which means there is more money to donate to nonprofits.  Another benefit a DAF provides is that the 501(c)(3) organization handles the management of the account, reducing the administrative hassle and time commitment on the part of the donor.

Bunching and DAFs are two ways a taxpayer can realize tax benefits for charitable donations under the new tax plan.  Taxpayers wishing to explore these two opportunities or other opportunities should contact appropriate counsel to discuss their particular circumstances and identify the options that are best for them.

Amanda Brenner | Farrow-Gillespie & Heath LLP | Estate Planning

Amanda Brenner‘s primary practice areas are estate planning, business formations, and nonprofit organizations. Ms. Brenner advises clients regarding estate planning; and the formation and operation of nonprofit organizations and private foundations. She graduated from University of Pittsburgh School of Law in 2015.

Nonprofit Organization Lobbying

Can my Nonprofit Organization Conduct Lobbying Activities?

A Section 501(c)(3) taxexempt organization may conduct limited lobbying activities without jeopardizing the organization’s taxexempt status, so long as lobbying does not form a “substantial part” of the organization’s overall work.

An organization that intends to lobby and wants to be tax-exempt can apply either as a 501(c)(3) public charity or as a 501(c)(4) organization.  Although a Section 501(c)(4 ) organization is tax-exempt (i.e., the organization itself pays no taxes), donations to it are not tax-deductible to the donor.  So typically, the 501(c)(4) route is not as popular an option as organizing under Section 501(c)(3).

If the organization wants to lobby but does not intend for lobbying to be its primary activity, it may be possible to organize and file for tax-exempt status as a 501(c)(3) organization.  A 501(c)(3) organization is tax-exempt itself, and donations to it are tax-deductible to the donor.  Under Section 501(c)(3), an organization can do some lobbying – it just cannot devote a “substantial part” of the organization’s activities to lobbying.

Lobbying can be “direct” or “grassroots.”  Direct lobbying is defined as any communication with a legislator that expresses a view about specific legislation (or other matter on which the legislator may vote).  Grassroots lobbying is defined as any communication with the general public that (a) expresses a view about specific legislation (or a matter on which the legislature is voting) and (b) includes a call to action.

The IRS has two alternative tests for determining “substantial.”  One way is in terms of relative time spent on lobbying activities.  The other and probably best way to stay beneath the “substantial” threshold is to meet the “expenditure test.”  A complete table is below, but in general, an organization with an overall budget of less than $500K may spend only up to 20% of that budget on lobbying.  To use the expenditure test, the organization must file a form to elect to do so, and then the expenditure reporting must appear on the organization’s normal 990 annual reporting form.

 If the amount of exempt purpose expenditures is:  Lobbying nontaxable amount is:
 ≤ $500,000  20% of the exempt purpose expenditures
 >$500,00 but ≤ $1,000,000  $100,000 plus 15% of the excess of exempt purpose expenditures over $500,000
 > $1,000,000 but ≤ $1,500,000  $175,000 plus 10% of the excess of exempt purpose expenditures over $1,000,000
 >$1,500,000 but ≤ $17,000,000  $225,000 plus 5% of the exempt purpose expenditures over $1,500,000
 >$17,000,000  $1,000,000

Certain gray-area activities have been held to be “non-lobbying advocacy” as opposed to “lobbying.”  These advocacy activities can be unlimited and do not count against the lobbying expenditure test.  Examples are educating policymakers and the public about broad social issues, encouraging people to register to vote, organizing communities, educating voters about candidate positions, litigating, conducting educational meetings, preparing and distributing educational materials, considering public policy issues in an educational manner, and other activities.

If a 501c3 organization goes over the line and devotes a “substantial” part of its activities to lobbying, then the penalties are severe. Tax-exempt status is retroactively lost; deductibility of donations is retroactively lost; a 5% excise tax may apply; and a very large penalty (usually 25%) applies to the tax that will be due.  Hence, close monitoring of lobbying activities is an absolute necessity.

A political activity in which a 501(c)(3) organization may never engage is to support or oppose any candidate for public office.  This prohibition is absolute.

All organizations that conduct lobbying are subject to reporting and disclosure rules at the state and local level.

For more information about nonprofit organizations, or to find out about our fixed fees for formation of charitable organizations and family foundations, please contact us.

Angela Hunt Assists Aldredge House to Keep Doors OPen

Forming a 501c3: The “Texas Three-Step”

Individuals and families may establish a 501c3 tax-exempt charitable organization to accomplish substantive philanthropy while receiving very favorable tax treatment. The degree of maintenance such an organization requires depends whether the organization can be classified as a public charity or is instead a private or family foundation.

Either way, forming a 501c3 is a three-step process.

Step One: Form the Organization

A charitable organization must be formed as a corporation in the state in which it is to be located. Many states, including Texas, have a special corporate form called a “nonprofit corporation,” which the organization is required to use be able to qualify for tax-exempt status. Special provisions must be included in the Articles of Formation.

Formation of a nonprofit corporation in Texas is less expensive than formation of a business corporation. To register the entity with the state, the filing fee is only $25.

Step Two: Obtain Federal Tax-Exempt Status from the IRS

Formation as a nonprofit organization does not automatically make the organization tax-exempt. For the organization’s income to be tax-free, and for donations to be tax-deductible to the donor, another step must occur. The organization must file for tax-exempt status with the IRS.  The application for tax-exempt status (Form 1023) is a comprehensive application for which legal assistance is usually desired. Small organizations may qualify for the new, simpler application (Form 2012-EZ) that was introduced in 2014. Most organizations with anticipated annual gross receipts of $50,000 or less and assets of $250,000 or less are eligible for the shorter application.

Step Three: Obtain State Tax-Exempt Status from the State of Formation

After an organization receives its tax-exemption letter from the IRS, a final step remains. The state in which the organization was incorporated must be notified of the IRS tax-exempt status. Most states, including Texas, have a streamlined process for obtaining state tax-exempt status once the IRS has approved federal tax-exempt status.

For a consultation on forming or administering a nonprofit organization or charitable foundation, contact us at (214) 361-5600 or email [email protected]

Liza Farrow-GIllespie | Farrow-GIllespie & Heath LLP | Dallas, TX

New Simpler 501c3 Application for Small Charities

In July 2014, the Internal Revenue Service introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

The new Form 1023-EZ is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

Previously, all groups — regardless of size — went through the same lengthy application process regardless of size. This process created long delays for all organizations seeking to receive tax-exempt status.

According to the IRS: “The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. . . . We believe that many small organizations will be able to complete this form without creating major compliance risks.”

A reduced fee accompanies the streamlined application.  Whereas larger groups required to use the standard Form 1023 must pay a filing fee of $850, smaller groups entitled to use Form 1023-EZ must pay only $400. For either application, the fee is due at the time application is made.

For more information on charitable organizations, call us at 214-361-5600 or contact [email protected]