Charities providing assistance in the time of Coronavirus
TAX ALERT |
On March 13, 2020, President Trump declared the coronavirus (COVID-19) pandemic a federal disaster. In the midst of the unprecedented global health crisis, many businesses and individuals are seeking ways to assist those affected by the pandemic and related closures. With the pandemic constituting a qualified disaster, charitable organizations of all types can assist those in need, including individuals and small businesses.
A “qualified disaster” includes a federally declared disaster,1 and the Federal Emergency Management Agency (FEMA) posts such disasters to its website.2 Qualified disaster relief payments are excluded from taxable income and are not subject to employment tax.3 These include payments from any source (including charities, private foundations, employers, and related organizations) if made for the following reasonable and necessary expenses incurred as a result of a qualified disaster:
- personal, family, living, or funeral expenses;
- expenses incurred for the repair or rehabilitation of a personal residence; or
- expenses incurred for the repair or replacement of the contents of a personal residence.4
However, qualified disaster relief payments do not include payments for expenses otherwise paid for by insurance or other reimbursements, or income replacement payments, such as payments of lost wages, lost business income or unemployment compensation.
Charitable organizations providing disaster relief
Charitable organizations, including public charities, private foundations and donor advised funds, may provide financial or in-kind assistance to individuals and businesses in the event of a qualified disaster.
Individual assistance could include basic necessities like food, clothing, housing, transportation, or medical care. Whether the aid is appropriate depends upon the recipient’s needs and resources. Immediate relief may be necessary in the event of an emergency, regardless of one’s financial resources. For example, by providing people with food while they are stranded or under quarantine due to the pandemic. Longer-term assistance may be rendered to individuals that have a demonstrable financial need or distress.
Assistance to businesses is permissible if doing so is a reasonable means of accomplishing the charitable organization’s exempt purpose and any private benefit is incidental to the accomplishment of that purpose. An example includes providing financial assistance to individual businesses in the wake of mandatory closures stemming from the pandemic.
Structuring disaster relief programs
As with any charitable program, a disaster relief program must serve a charitable class, rather than specific individuals or private interests. To constitute a charitable class, the group must be sufficiently large as to be indefinite. In other words, the community as a whole benefits from the organization’s assistance, rather than a pre-selected group. Examples include the residents of a particular city, state or country, or all current and future employees of a company. Organizations should exercise care in structuring programs around a singular disaster as it could result in too narrow of a class of beneficiaries to constitute a charitable class. For example, a disaster relief program could be structured to assist a company’s employees affected by national health emergencies that are qualified disasters, rather than employees affected by the coronavirus pandemic.
Organizations offering disaster relief support should establish criteria and procedures to determine when aid should be offered and discontinued. These procedures must include maintaining adequate records to demonstrate that the organization’s payments further its charitable purposes and that the victims served are in need or distress. Organizations distributing short-term emergency assistance need only maintain basic records relative to the immediate need assistance provided, while those distributing longer-term aid must keep detailed records regarding the recipients and aid provided.
Because public charities typically solicit funds from the general public and are subject to more public scrutiny and oversight, they are less restricted in the type of disaster assistance they may offer than other types of charitable organizations. Public charities may provide the types of relief described above without significant restrictions, including assistance for emergency hardships not associated with a qualified disaster.
Public charities affiliated with a for-profit employer may provide disaster relief to the related employees for any type of disaster or emergency hardship situation, if the employer does not exercise excessive control over the charitable organization. To ensure that the employee relief program does not result in impermissible private benefit to the employer, the program must serve a charitable class, recipients of aid must be selected based on an objective determination of need, and the recipients must be selected by an independent committee or through adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. If these conditions are met, disaster relief assistance is presumed to be made for charitable purposes and does not constitute taxable compensation to employees.
On the other hand, private foundations typically receive less public scrutiny and oversight, as they have few, or even a single, sources of funding, resulting in more restricted rules governing their operations and disaster assistance. Private foundations are subject to excise taxes,5 such as those on acts of self-dealing, and must ensure that income or assets of the foundation are not used by or for the benefit of a substantial contributor to the foundation (such as the sponsoring family or company) or a person in a position of control over the foundation.
Many employers establish private foundations to further the philanthropic and community efforts of their organization, and these foundations are typically prohibited from providing any financial benefit to employees of their corporate sponsor. However, in the event of a qualified disaster, employer-sponsored private foundations may provide employees and their family members with qualified disaster relief assistance if the fund serves a charitable class, recipients are selected based upon an objective determination of need, and recipients are either selected by an independent selection committee or through adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. The foundation’s selection committee is independent if a majority of the members of the committee consists of persons who are not in a position to exercise substantial influence over the affairs of the employer.
These safeguards are intended to ensure that disaster relief assistance serves a charitable purpose and not the private business interests of the employer. Payments and support can only be made to employees or their family members that are affected by qualified disasters and not in non-qualified disasters or emergency hardship situations. If these requirements are met, the private foundation’s qualified disaster relief aid is treated as made for charitable purposes and does not create prohibited self-dealing6 merely because the recipients are employees, or result in taxable compensation to the employees.
However, this exclusion from self-dealing does not apply to any payments that would otherwise constitute self-dealing for reasons other than employment by the sponsoring organization and any such payments remain subject to excise taxes. For example, the presumption does not apply to payments made to (or for the benefit of) individuals who are directors, officers or trustees of the private foundation or members of the private foundation’s selection committee. Further, a program may not be used to induce employees to follow a course of action sought by the employer or designed to relieve the employer of a legal obligation for employee benefits.
Donor advised funds
Donor advised funds are separate accounts owned or controlled by community foundations or other public charities over which the donor has or reasonably expects to have advisory privileges.7 Donor advised funds typically make grants to section 501(c)(3) public charities or other organizations for certain charitable purposes but may not make grants to individuals.8 However, there is an exception for certain employer-related funds or accounts established to benefit employees and their family members who are victims of a qualified disaster.9
In the event of a qualified disaster, donor advised funds may make disaster relief grants to employees and their family members, under the following conditions:
- the fund serves the single identified purpose of providing relief from one or more qualified disasters;
- the fund serves a charitable class;
- recipients are selected based upon an objective determination of need;
- recipients are either selected by an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous;
- no payment is made from the fund to or for the benefit of any director, officer, or trustee of the sponsoring community foundation or public charity, or members of the fund’s selection committee; and
- the fund maintains adequate records to demonstrate the recipients’ need for the disaster assistance provided.
Creating a disaster relief organization
Working with an existing charitable organization is often the most efficient use of disaster and emergency relief resources. Community-based organizations, religious organizations, and relief organizations such as the Red Cross are typically well positioned within their communities to provide and direct assistance in the context of unforeseen disasters. In addition, even if a charitable organization was not specifically established or intended to provide disaster relief, an existing charity that has obtained tax-exempt status generally may engage in disaster relief activities without obtaining prior approval from the IRS.10
If working within an existing charitable organization is not a reasonable option, or if long-term goals extend beyond the emergent disaster, it may be appropriate to establish a new charitable organization. To qualify for section 501(c)(3) tax-exempt status, an organization must be organized and operated exclusively for charitable purposes and must be able to demonstrate that it serves the broader public rather than private interests. Generally, new charities must submit a Form 1023, Application for Recognition of Exemption, within 27 months of the date of formation in order to be recognized as tax-exempt from inception.
Typically, the IRS processes Forms 1023 in the order received, but an organization established specifically for disaster relief to victims of emergencies may request expedited processing of its application by including a statement that includes the following, to the extent applicable:
- a compelling reason to process the application ahead of others;
- a brief description of the disaster and details of how the organization will provide relief;
- an explanation of the immediate need for the organization’s specific disaster relief services;
- a description of any pending grants, including information about the grantor and the amount or property to be received;
- an explanation of how the loss of the grant(s) might impact the organization’s ability to operate and provide relief;
- a description of any significant business emergency (such as an impending deadline imposed by a court or government agency) demonstrating that the business emergency will significantly impact the applicant’s ability to operate and explaining how expediting the application will enable the applicant to avoid the emergency;
- a statement explaining any other anticipated consequences if expedited processing is denied; and
- the date an exemption letter is required.11
How RSM can help
RSM’s exempt organization tax practice can assist your existing organization in reviewing, modifying, or structuring its disaster relief program to address the needs of your grantees and community. It can also assist you with establishing a new disaster relief organization.
2FEMA Disasters (last accessed March 18, 2020).
3Section 139(a), (d).
9Notice 2006-109, Section 5.01, 2006-2 C.B. 1121 (December 4, 2006).
10Note that an existing charitable organization entering into disaster relief activities which were not included in its application for exemption is required to report the disaster relief as a new activity on its annual Form 990 series return and may wish to report a change in its activities to the IRS Exempt Organizations Determinations Office. Such organizations should also consult with legal counsel to determine what changes, if any, need to be made to their governing documents.
11IRS Pub. 3833, Disaster Relief Providing Assistance Through Charitable Organizations (Rev. 12-2014).