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Setting up a tax-exempt charity – you can do it

By Darin DeAngeli
Ahrens DeAngeli Law Group

A donor considering establishing a new charity in Idaho should ask: what is the charitable purpose and can an existing charity achieve the donor’s goals? If no such charity exists, the donor should conduct “market research” to determine if a new charity is warranted. If the donor’s charitable intent matches a charitable need, then the donor can begin to create and then operate a charity.

To create a new charity, a donor first must select a legal and tax structure. The two primary legal structures for a charity are a nonprofit corporation and a charitable trust.

Nonprofit corporations are usually the preferred legal structure for operational charities versus those charities which simply make grants. This structure allows for ease of administration and revision of charitable purposes as circumstances change. Nonprofit corporations must obtain approval from the state prior to operating and must report annually to the state.

Charities that are primarily grant-givers are often formed as charitable trusts. Charitable trusts provide greater certainty that the donor’s charitable purposes will not be changed in the future. Charitable trusts are more easily established (upon the signature of the creators and contribution of assets) than nonprofit corporations and usually have no initial or ongoing state filing to maintain their status as a charity.

State law governing nonprofit corporations is more uniform and defined than the law governing charitable trusts. However, if a trust is drafted carefully and flexibly, most issues addressed by nonprofit corporations statutes can be included in a charitable trust.

The tax structure for a charity will be determined by a variety of factors. First, if the creators of a charity want it to qualify for a tax-deductible contribution, the charity must be organized and operated exclusively for religious, charitable, scientific, literary, public safety, or other similar purposes under Internal Revenue Code section 501(c)(3). Section 501(c) governs myriads of charities which pay income tax, but only those described in section 501(c)(3) allow income tax deductions for donations to such organizations.

Section 501(c)(3) contains a choice of 15 to 20 tax classifications for a charity. Certain section 501(c)(3) organizations called public charities are used for broad public purposes and generally have public boards and broad public financial support, e.g. schools, museums, hospitals and similar organizations.

Other common section 501(c)(3) organizations are “private foundations,” which usually have single person/single family board control and a small number of donors. Other choices for tax structures include private operating foundations, exempt operating foundations, community foundations, and supporting organizations, each of which has different uses and rules. Donor’s intent will dictate the selection of the tax structure for the charity, together with tax rules, expected charitable operations, access to fundraising, type of assets donated, the ability to attract a public board, and other factors.

After the tax and legal structure of a charity is chosen and the organizational documents are written and executed, the charity must apply for tax-exempt status with the Internal Revenue Service. This process can be tedious but will nearly always result in a charity being granted tax-exempt status (presuming the operations of the charity are for an allowable charitable purpose).

Operating a charity is often similar to operating a business because the charity will embrace similar employment, financial and operational issues; however, certain charities can operate less formally if they are grant-making charities with no employees.

Most charities have nearly as much of the following responsibilities as operating businesses: federal, state and local tax reporting (even though no tax is collected, complicated tax forms must be filed); state and local registrations (such as charitable solicitations or raffle registrations); and transactional restrictions (prohibited or regulated business transactions with related parties, political and lobbying restrictions, etc.).

It bears emphasizing to those who operate charities or those who would complain about donations to charities being consumed by “operating overhead” that tax-exempt charities are not at all regulation-exempt, and the costs to charity of ever-increasing regulation is a burden borne by both donors and charitable beneficiaries alike.
Darin DeAngeli, through a professional corporation is an attorney for Ahrens DeAngeli Law Group LLP in Boise.

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