What Makes a Charitable Organization, Eligible?

By

Colleen Cosgrove

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July 4, 2023

This article is Tax Professional approved

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Ever wondered what makes a charitable organization eligible for tax benefits? Well, it's all about meeting a set of critical criteria defined by the IRS.

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  • Recognition: The organization must be recognized as a charity by the IRS.
  • Non-Profit Status: The entity needs to operate on a non-profit basis.
  • Public Benefit: Its mission should be for the public benefit.
  • Restricted Activities: Certain activities and operations are off-limits.

So, if you’re a business owner considering a charitable endeavor, it’s essential to understand these pointers. This knowledge can help you make the most of the tax advantages available to eligible charitable organizations.

Types of charitable organizations

When it comes to charitable organizations, you’ll find there’s a broad spectrum out there. Just like a kaleidoscope of butterflies, each one is unique in its mission and structure. But, for tax purposes, we generally group them into a few main categories. Let’s dive into what they are!

First off, we have public charities. These do-gooders are designed for the public benefit, think organizations like the American Red Cross or the Salvation Army. They typically rely on public donations and business grants, and they’re the most common type of registered nonprofit.

  • Private foundations, on the other hand, are often funded by a small group or a single individual. Think Bill & Melinda Gates Foundation. They give out grants to other organizations, instead of operating their own charitable programs.
  • Then there are charitable trusts. These are legal arrangements where assets are placed under the control of a trustee, who manages the assets for the benefit of the charity.

Finally, we have groups like social advocacy organizations and trade organizations. These groups don’t always fit into the neat categories above, but they still play a crucial role in society. They often aim to influence public policy or support certain industries.

What are the IRS Guidelines for eligible charitable organizations

Let’s chat about the Internal Revenue Service, or the IRS. When it comes to determining which charitable organizations are eligible for tax-deductible contributions, they’re the big game in town. The IRS has a specific set of guidelines these organizations must meet to be considered eligible.

The first criterion is all about the legal structure. Charitable organizations must be organized and operated exclusively for exempt purposes. These include religious, charitable, scientific, literary, or educational purposes, among others.

  • Religious: Includes churches, a convention or association of churches, temples, mosques, synagogues, etc.
  • Charitable: Relates to relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; etc.
  • Scientific: Designed to promote, encourage, or foster scientific investigation and research where the results are made available to the interested public.
  • Literary: The advancement, encouragement, and improvement of the literature.
  • Educational: Schools, colleges, and other similar institutions.

Secondly, these organizations cannot be geared towards benefiting private interests, such as those of the founder, the founder’s family, shareholders of the organization, or persons controlled directly or indirectly by such private interests.

The final requirement involves lobbying and political activities. It’s a tad bit tricky. No substantial part of an eligible organization’s activities can involve carrying out propaganda or otherwise attempting to influence legislation. They cannot participate in, or intervene in, any political campaign for or against any candidate for public office.

Note: The IRS offers a handy tool, the Tax Exempt Organization Search (TEOS), to check the federal tax status and filings of potential charitable organizations. It’s a good friend to have in your charitable giving journey.

The importance of 501©(3) status

In the whirlwind of planning and execution, there’s a key element that you can’t afford to overlook - securing a 501©(3) status.

What’s the big deal about this 501©(3) status anyway, you ask? Well, let me tell you, it’s not just a fancy title. This status, granted by the IRS, comes with a package of privileges that are crucial for your charitable organization.

  • Tax Exemption: The prime advantage is that organizations with 501©(3) status are exempt from federal income tax. That means more of the funds can be dedicated to the cause rather than Uncle Sam.
  • Donor Incentives: Further sweetening the deal, donations to 501©(3) organizations are tax-deductible. This provides a strong incentive for individuals and businesses to open their wallets for your cause.

Grant Eligibility:

Many public and private grants are only accessible to 501©(3) organizations. This status essentially opens doors to a world of additional funding opportunities.

But remember, with great power comes great responsibility. A 501©(3) status imposes certain administrative requirements and standards of transparency. It’s like a seal of trust, assuring the public that your organization is committed to its charitable purpose and accountable for its financial operations.

Securing a 501©(3) status is not just a bureaucratic hoop to jump through. It’s a key element in establishing your charitable organization’s credibility and ensuring its financial health. So, think of it as a priority, not just a checkbox on your to-do list.

How to determine if a charity is eligible for tax deductions

Ever wondered how to tell if a charitable organization you’re thinking of supporting is actually eligible for tax deductions? Well, there’s a handy little roadmap you can follow to make sure your generous donation not only helps a worthy cause but also helps your tax bottom line. Let’s dive in, shall we?

The first step on this tax deduction journey is to check the status of the charity. The IRS maintains a comprehensive list of organizations you can donate to and qualify for a tax deduction. You’ll want to go to their website and use the TEOS (Tax Exempt Organization Search) tool.

Note: It’s crucial to remember that not all non-profit organizations qualify for tax deductions. Only those classified as 501©(3) entities are eligible(which we mentioned above).

Now, suppose you’ve confirmed that the organization is indeed a 501©(3). The next step is to ensure that your donation itself qualifies. Cash, checks, and donations of property usually do. However, time or services do not.

What are some common mistakes to avoid when donating to charities?

One common mistake many people make when donating to charities is not doing any research about the organization. They might hear about a cause, feel moved, and decide to donate without knowing much about the organization itself. This can sometimes result in donations going to less than reputable organizations. Here are

  • Not Checking Deductibility: Not all charitable organizations are eligible for tax deductions. Therefore, if you’re aiming for a tax deduction, it’s crucial to ensure the charity has a tax-exempt status recognized by the IRS.
  • Ignoring the Organization’s Transparency: Charities should always be transparent about where their funds are going and what they’re being used for. If an organization isn’t being clear about their expenditures, it might be a red flag.
  • Forgetting to Document Donations: For tax purposes, you must have documentation of your donation. This could be a receipt or a bank statement. Without this, you won’t be able to claim the donation on your taxes.

Lastly, a significant error is contributing to charities that spend a large portion of donations on administrative costs or fundraising, instead of the cause they support. Websites like Charity Navigator or GuideStar can provide you with information about a charity’s financial health and allocation of resources.

List of qualified charitable organizations in the USA

There are numerous charitable organizations in the USA that are tax-eligible. Here are some of the most recognized and reputable ones:

  • United Way Worldwide - Known for its annual workplace campaigns and focus on education, income stability, and health.
  • Salvation Army - Provides a broad array of services, from disaster relief to combatting addiction.
  • Task Force for Global Health - Works to improve health conditions worldwide, particularly in low-income countries.
  • St. Jude Children’s Research Hospital - Specializes in the research and treatment of pediatric catastrophic diseases.
  • Feeding America - A nationwide network of food banks fighting against hunger.

Each of these organizations has a proven track record, both in terms of their outreach and their financial responsibility. However, it’s always a good idea to do some research on your own and ensure that your donation will be put to good use.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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