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Archive
December 2005
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Post-Katrina Measures Promote Charitable Giving Frequently Asked Questions About Charities and Disaster Relief New FEC Regulations In Effect This Election Cycle Is It Time to Beef up Your Board? IRS Issues 2006 Inflation-Adjusted Rates Post-Katrina Measures Promote Charitable Giving The Katrina Emergency Tax Relief Act and other measures instated in the wake of Hurricane Katrina include a number of provisions intended to promote charitable giving and ease the financial burden on individuals donating time to relief efforts. Nonprofits should be aware of these new provisions, as some apply not just to charities working in the Gulf Coast, but all charitable organizations. The incentives they create for donors may provide charitable organizations with increased sources of funding at a time when the demand for charitable donations is rising considerably. The Katrina Emergency Tax Relief Act The Katrina Emergency Relief Act raises the income-based limits on the tax deductions that individual donors can take on charitable donations of cash. Cash donations to most public charities between August 28, 2005 and December 31, 2005 will not be subject to the 50% annual charitable deduction limitation or 3% phase out for itemized deductions applicable to high earners. This temporary measure is not limited to charities carrying out Katrina-related programs. The Act also includes incentives for corporate donors who make Katrina-related cash charitable donations. Specifically, corporations donating to Katrina-related public charitable programs will not have these contributions subject to the 10% limitation, so long as contributions are made before the end of 2005. In addition to providing incentives for donors, the Act provides a measure of relief to volunteers engaged in post-Katrina relief work. Volunteers using personal vehicles to engage in relief work may take a deduction of 70 percent of the standard business mileage rate, or 34 cents per mile through the end of 2005, and 32 cents per mile in 2006. This represents a significant increase from the standard rate of 14 cents per mile. In addition, a volunteer who is reimbursed by a charity or private foundation for use of a personal vehicle in Katrina-related work will not have to pay income tax on the reimbursements up to the amount that does not exceed the standard business mileage rate (see below). IRS Leave-Donation Programs The IRS is also working with employers to promote leave donation programs that provide new opportunities for individuals to give to charities. These programs allow employees to donate unused leave to their employers, who in turn make cash contributions to qualified tax-exempt organizations participating in Katrina relief work. Employers (but not employees) can then take either a charitable or business deduction for the donated amount. This program is available to employers and employees through December 31, 2006. By Damon King  Frequently Asked Questions About Charities and Disaster Relief In the aftermath of Hurricane Katrina, many nonprofit organizations have expressed an interest in extending assistance and relief to those affected by the tragic events. It is important for such organizations to understand the IRS guidelines that should govern any charitable giving in these circumstances. Can a nonprofit make a donation to a disaster relief organization that helps Hurricane Katrina Victims? Yes. According to the IRS, one 501(c)(3) may give money to another charity to assist with disaster relief. Can a nonprofit that is organized for purposes other than disaster relief provide assistance? Yes. A nonprofit organization may provide disaster relief assistance even if disaster relief was not specified in its exemption application. However, if a charity decides to undertake new activities such as this, the activities should be reported to the IRS and noted on its annual return. Who constitutes a charitable class? The only group of individuals that a charitable organization can assist is called a charitable class. According to IRS guidelines, a charitable class must be "sufficiently large or indefinite that the community as a whole rather than a pre-selected group of people is benefitted." This means that the group of people that the charity targets may all live in the same city, county or state. If the charity wishes to assist a smaller class of people, the assistance must be indefinite, that is, the aid must be open-ended and therefore open to both those affected by the current disaster as well as those affected by future disasters. It is not permissible to select a small and specific group of individuals (such as members of one's organization) for one-time disaster assistance. Contributions may not be earmarked to provide relief to particular individuals. How is need determined? Individuals receiving help from charitable organizations must be determined to be financially in need. Charitable funds may not be given to individuals simply because they are victims of a particular disaster. However, to be eligible for aid, an individual does not have to be destitute either. In order to qualify, individuals must lack the resources to obtain basic necessities including, but not limited to: shelter, food, clothing, and medical attention. Charities may provide emergency relief in such forms as hot meals, blankets, crisis counseling or rescue services without determining financial need because individuals in need of such services are determined to be distressed regardless of their financial situation. However, longer term or wider ranging relief requires a financial need assessment before the charity proceeds with the provision of aid. What kind of paperwork does this entail? Charitable organizations that desire to engage in Hurricane Katrina disaster assistance must be mindful to document their efforts. Records should be kept which show that individuals receiving aid constituted a charitable class and fit the IRS definitions of need. The organization should also be able to provide documentation that the relief and aid that it provided furthered its own charitable purposes. As established by the special statutory rule enacted after September 11, 2001, documentation must include:
Where can I find more information on charitable organizations and disaster related relief? The IRS has published a number of helpful publications on this issue including: Publication 3833: Disaster Relief: Providing Assistance Through Charitable Organizations; Publication 1771: Charitable Contributions - Substantiation and Disclosure Requirements; Publication 2194: Disaster Assistance Kit, and Publication 1600: Disaster Losses - Help from the IRS. By Emily Welty New FEC Regulations In Effect This Election Cycle Navigator readers may recall that last year the Federal Election Commission (FEC) undertook a rulemaking process that had the potential to radically change the rules that govern advocacy by nonprofit organization, including those exempt under section 501(c) as well as section 527. The result was a set of new regulations that took effect in 2005 (See Nonprofit Navigator, August 2004). A recent FEC ruling highlights some of the implications of those regulations, and serves as a reminder that all nonprofits need to be wary, in particular when raising funds with messages that mention anyone who is a candidate for federal office. Consequences for organizations that maintain a non-PAC 527 account can be draconian; they also may be limited in how they use those funds by new rules on allocation of costs. Solicitation Rules The new regulations state that anything received in response to a communication is a contribution "if the person making the communication indicates that any portion of the funds received will be used to support or oppose the election of a clearly identified Federal candidate." An organization that receives $1,000 or more in contributions risks being treated as a regulated Federal political committee if it is found to have as a "major purpose" the nomination or election of one or more candidates. The FEC has not stated how it determines an organization's "major purpose," but it is likely that most 501(c)s would be protected from being forced to register as PACs. However, they must still be careful not to accept "contributions" from prohibited sources such as corporations, labor unions and foreign citizens. Accepting contributions could also be used as evidence of an electoral "major purpose" that puts the organization at risk for being considered a PAC. Nonprofits that maintain a non-PAC 527 account must be more cautious about their solicitations under the new rules. These accounts may not be protected by the major purpose test, and if they accept any contributions, the account itself may be treated as a PAC, subject to all the associated restrictions. This means that nonprofits must walk a fine line when raising funds for their 527 accounts: explaining to donors the "political" purposes of the account, without indicating that donations will be used to elect or defeat specific candidates. The safest approach is to avoid any reference to a candidate (by name, title, or other unmistakable identification). Those organizations that want to discuss specific candidates or races with their donors should get careful legal advice to avoid soliciting "contributions" to a 527 account. Allocation Rules In the past, the regulations governing the allocation of money between a PAC's different accounts were criticized by some for allowing soft money to pay for voter registration, get-out-the-vote efforts and other activities that appeared to influence federal elections. The new rules require use of only hard, or "federal", dollars for certain voter involvement activities and advocacy communications. For instance, voter mobilization and public communications that refer to a political party but no clearly identified candidate must be paid for with at least 50% hard money. Public communications that refer to a federal candidate but no non-federal candidates must be paid with 100% hard dollars. In general, 501(c) nonprofits are not governed by these allocation regulations. However, there is some ambiguity about their application to a 527 account. An organization seeking a legally cautious approach may want to use the account to pay only for those costs that the regulations allow to be paid with soft, or "non-federal," dollars. These include public communications that do not refer to federal candidates or parties, and voter drives that also avoid reference to candidates associated with a particular issue position. It is important to keep in mind that a "reference" to a candidate does not need to mention her or his candidacy, elections or voting in order to be subject to these regulations. It is also critical to check state and local election laws in planning these activities. The recent FEC ruling issued to EMILY's List, AO 2005-13, illustrated the sweep and literal application of the new regulations. For instance, even though the organization's budget anticipated spending almost twice as much money promoting state and local candidates as it would spend for federal candidates, the FEC ruled that the regulations require EMILY's List to use hard money to pay for at least one-half of its administrative costs. Clearly the Commission intends to apply its regulations as written, even when the result seems harsh. By Elizabeth Kingsley Is It Time to Beef up Your Board? The IRS is proposing changes to Form 990 (the information return many tax-exempt organizations are required to file each year) that will help it learn more about transactions between the filing organization and its key decision-makers, their families, and their business partners. This may spell an opportune time for filers of the 990 to take some steps to decrease their chance of examination by the IRS. Part V of the form, which requests information about the organization's current and former officers, directors, trustees and key employees, has been expanded in the draft 990 for the 2005 tax year. The proposed form asks a number of new questions, including how many individuals are permitted to vote on the organization's business, whether there are family or business relationships between key decision-makers and others compensated by the organization, and whether the organization has a written conflict of interest policy. Boards comprised of one or only a few voting members that do not follow a written conflict of interest policy are thought by the IRS to be more likely to pay excessive compensation to themselves, their relatives, business partners, or other organizations from which they receive income. The additional questions posed in the draft are clearly designed to help the Service ferret out potential excess benefit transactions under section 4958 of the Internal Revenue Code (See Nonprofit Navigator, February 2002). If a tax-exempt organization is found to have engaged in an excess benefit transaction, not only the person receiving the benefit but also anyone in a position of authority who approved the transaction could be fined. In severely abusive cases, revocation of the organization's tax-exempt status is possible. Excessive compensation arrangements have been the subject of one of the IRS's compliance initiatives this year. The IRS has indicated it will use the data provided by the initiative and the new 990 to target its enforcement efforts in 2006 and beyond. Organizations with few directors and no conflict of interest policy that report compensation under the new Part V of the 990 could find themselves receiving compliance-check letters from the IRS soon after their 2005 990 is filed, assuming the form is finalized as currently drafted. This presents an opportunity for nonprofits to beef up their boards before the end of their 2005 tax year by adding additional voting members and, if they have not already done so, adopting a strong conflict of interest policy. Also, organizations may want to review their compensation arrangements with anyone who is in a position to exercise substantial influence over the organization, or is related to or engaged in another business with such a person, to ensure those arrangements are reasonable. In short, there may never be a better time for a nonprofit to beef up its board and its policies and procedures for establishing compensation. By Paul J. Murphy IRS Issues 2006 Inflation-Adjusted Rates The IRS has released inflation adjusted figures for the 2006 tax year, which will be of interest to individuals and nonprofit organizations. Low Cost Article The unrelated business taxable income of certain exempt organizations does not include proceeds from the distribution of "low cost articles" in connection with charitable solicitations. For the tax year beginning in 2006, a "low cost article" is any article which costs $8.60 or less. 2005: $8.30 2006: $8.60 Other Insubstantial Benefits The IRS established guidelines in Rev. Proc. 90-12 to provide charitable organizations with help in advising their patrons of the deductible amount of contributions when the contributors are receiving something in return for their contributions. The original guidelines state that the value of benefits received by a donor in return for a fully-deductible charitable contribution may be disregarded if either: 1) for a contribution of $25 or more, the contributor did not receive something in return that costs more than $5 (or the rate for a "low cost article" listed above); or 2) the fair market value of all of the benefits received in connection with the payment is not more than 2 percent of the payment or $50, whichever is less. The $5/$25/$50 schedule is annually adjusted for inflation and this year has been increased to $8.60, $43, and $86, respectively. 2005: $8.30/ $41.50/ $83.00 2006: $8.60/ $43.00/ $ 86.00 Mileage Effective September 1, 2005, the IRS increased the standard mileage deduction rate for business use of an automobile to 48.5 cents/mile. This is an 8 cent increase over the 2005 rate through August 31. The standard mileage deduction rate drops to 44.5 cents/mile for 2006. The figure for volunteer or charity work, which is set by Congress, remains at the 14 cents/mile rate in effect the last three years. However, drivers who use their own vehicles assisting Katrina victims may deduct 32 cents/mile in 2006. 1/1/05 - 8/31/05: 40.5 ¢/mile 9/1/05 - 12/31/05: 48.5 ¢/mile 2006: 44.5 ¢/mile Reporting Exemption for Lobbying Expenditures Rev. Proc. 98-19 set at $75 or less - annually adjusted for inflation - the amount of annual dues that social welfare organizations may receive without becoming subject to I.R.C. §6033(e). Section 6033(e) requires a tax-exempt organization that incurs non-deductible lobbying expenditures to notify its members, at the time that the dues are assessed or paid, of its reasonable estimate of the portion of the dues that is allocable to those expenditures. In 2006, the annual dues limitation to qualify for the reporting exception regarding certain exempt organizations with nondeductible lobbying expenses is $91 or less. 2005: $88.00 2006: $91.00 Non-Member Dues In 2006, dues paid by an individual to 501(c)(5) agricultural and horticultural organizations and 501(c)(6) organizations will not be subject to UBIT provided they do not exceed $131. 2005: $127.00 2006: $131.00 Annual Exclusion for Gifts The first $12,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year. 2005: $11,000.00 2006: $12,000.00 Itemized Deductions The income threshold for the overall limitation on itemized deductions, which rises slightly each year, has risen to $150,500 or $75,250 for a married individual filing separately. The allowable amount of deductions is reduced for taxpayers with adjusted gross income above that amount. 2005: $145,950.00 2006: $150,500.00 By Emily Welty A Primer on Copyrights What is copyright? Copyright is a legal form of protection provided to the authors of "original works of authorship." These works may take a variety of forms: literary works, research publications, pamphlets, newsletters, journals, articles, musical works, dramatic works, pictoral/graphic/sculptural works, films/audiovisual works, sound recordings, and architectural works. Copyright owners have the right to reproduce their work, distribute copies of their work, display the work publicly, and create derivative works, among other rights. How does an author obtain a copyright? Contrary to popular belief, nothing needs to be filed or registered in order for an author to have a copyright. Copyright protection automatically exists the moment that a work is finished. One need not register with the US Copyright Office in order to secure a copyright. However, there are significant advantages to registering a copyright. Advantages of registering a copyright While copyright registration is not a prerequisite of copyright protection, there are still substantial legal advantages to having a copyright registered. Registration establishes a public record of the copyright claim which may make legal claims in court easier to prove. If the copyright is registered and an infringement suit arises, the copyright owner can be reimbursed for the attorney fees paid to bring the suit and can be awarded "statutory" damages without having to prove the violation resulted in actual harm. If the copyright is not registered, the best outcome of an infringement suit would be an award of actual damages and profits that have been proven in court; the copyright owner will have to pay what could prove to be significant legal fees to stop the copyright violation. Since it is both legally advisable and relatively easy and inexpensive to register a copyright, it is highly recommended that all individuals and corporations that possess intellectual property register their copyrights. How to register a copyright In order to register a copyright on a work, three items must be sent to the Copyright Office at the Library of Congress: a nonrefundable filing fee of $30, a completed application form (available at www.copyright.gov) and a nonreturnable copy of the work being registered. For more information about copyright and copyright registration, please see: Publication 563 "How to Protect Your Intellectual Property Right" from the US Customs Service, the Library of Congress Copyright Office website (www.copyright.gov) or contact an attorney at Harmon Curran Speilberg Eisenberg, LLP. By Emily Welty This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required. Newsletter Home | HarmonCurran Home | |