Question: Hawaii consumers face lots of choices and competition for donating to nonprofit organizations. Is it a good idea to find out whether a nonprofit is tax-exempt before donating?

Answer:Typically you want to make sure your donation is going to a tax-exempt charitable organization. Not all nonprofits are tax-exempt, and not all tax-exempt nonprofits are charitable. Charitable tax-exempt organizations can offer significant tax benefits for your donation. Of course, charitable giving is about more than just seeking to maximize your tax benefits; it is about supporting worthy causes important to the donor. Decisions about philanthropy should be taken as seriously as any other important financial decision. Donors can check the Internal Revenue Service website (irs.gov/app/eos) to determine whether a donation is tax-deductible.

PROFILE

JEFF PIPER

>> Position: Corporate law and taxation attorney often representing tax-exempt organizations

>> Company: Schlack Ito

>> Website: honolulu-lawyers.com

>> Phone: 523-6040

>> Age: 49

>> Education: Law degree from University of California at Los Angeles

>> Affiliations: Member of the Hawai‘i Alliance of Nonprofit Organizations

 

Q: What generally qualifies a nonprofit to be tax-exempt?

A: Tax-exempt status comes in various forms and categories. There are tax-exempt social clubs, labor unions, trade associations and, in the news more recently, 501(c)(4) social welfare organizations. However, when most people think of tax-exempt organizations, they are thinking about charitable, religious and educational institutions which are tax-exempt under Internal Revenue Code Section 501(c)(3). The nonprofit state law and federal and state tax laws impose various requirements to obtain such status, including the requirement they be organized and operated exclusively for charitable purposes, assets … (are not used to benefit) insiders, that the organization not become involved in political campaigns and that lobbying activity be an insubstantial part of the organization’s activities.

Q: Does the tax exemption benefit donors as well as the nonprofit?

A: Tax-exempt status, and more particularly 501(c)(3) status (subject to a few special rules), can benefit both donors and the charity. Donations to a charitable 501(c)(3) organization can offer significant income and/or estate tax deductions which will vary depending on the asset donated, the donor’s particular tax situation and the specific tax classification of the charity.

Q: Are there differences among 501(c)(3) organizations that can affect a donor’s deductible contributions?

A: Under Code Section 501(c)(3), there are two very common forms of organizations: public charities and private foundations. Public charities derive their income from many different donors or sources, or they fit within special categories, such as schools, churches or hospitals. Private foundations are characterized by a limited number of donors, often a family or a company, but the tax benefits for such contributions may be less than for donations to public charities.

Q: Are there nonprofits that do good work but aren’t tax-exempt?

A: There are very few taxable nonprofits, but often people will be asked to donate to a project or cause that may not have its own 501(c)(3) status. In this case an existing 501(c)(3) organization might be able to serve as a "fiscal sponsor" for the project. More recently, sophisticated donors and organizations have created "social enterprise" models where worthy goals such as community economic development can be pursued through for-profit vehicles, the hybrid organizations becoming available in a number of states, and even well-planned combinations of for-profit and tax-exempt organizations.

Q: Where can consumers check to see whether a nonprofit is a tax-exempt organization?

A: There are number of ways to determine if a charitable organization actually holds a valid 501(c)(3) determination letter. The IRS website has a master list, and one can also ask the organization for a copy of its determination letter. However, keep in mind that because the IRS does not require churches to apply for exempt status, churches sometimes do not have determination letters. At the website guidestar.org, one can register for free and search for charities and even download an organization’s IRS Form 990 or 990-PF informational tax return, something that I find very useful.

The state attorney general’s office also regulates the solicitation of funds for charitable purposes among other matters, and most organizations are required to register with their office prior to solicitation. Donors may search the attorney general’s registry online (ag.ehawaii.gov/charity) to obtain the charity’s registration and financial reports.

If professional solicitors or fundraising counsel are employed by the organization, there are additional filing and disclosure requirements. The office has a searchable database of these filings (hawaii. gov/ag/charities).

Finally, don’t be shy about asking the organization itself for more specific information about its mission, activities and operations, finances and how it intends to use the funds you are donating.

_______

Interviewed by Andrew Gomes

"Akamai Money" seeks out local experts to answer questions about business in Hawaii. If you have an issue you would like us to tackle, please email it to business@staradvertiser.com and put "Akamai Money" in the subject line.