Friday, March 27, 2015

Tax Time: Top Tips for Reporting Charitable Deductions


            With April 15 fast approaching, now is the time to make the most of charitable tax deductions.  Many people give significant amounts to charities, schools, religious institutions, and other nonprofit organizations, with an accompanying expectation of tax deductibility.  Through such giving, donors not only help worthy causes but also can reduce their personal tax liability through itemized deductions.  Here are some top tips for maximizing the charitable tax deduction.

1)         Use the right tax forms.

            To take advantage of the charitable deduction, taxpayers must use IRS Form 1040 along with its Schedule A for itemized deduction.  Schedule A effectively reduces the total amount of income subject to taxation, but it is not available for use with IRS Form 1040-EZ.  Itemized deductions often allow for greater tax benefits than the otherwise applicable standard deduction.  For example, filers with large mortgage payments and/or extensive charitable giving may be able to deduct more by itemizing their deductions than they would by simply taking the standard deduction.  The 2014 standard deduction is only $6,200 if single or married filing separately, $12,400 if married filing jointly, or $9,100 if filing as a head of household.  If itemizing deductions results in higher tax savings than the standard deduction, make sure to use the Form 1040 and accompanying Schedule A.

2)         Get (and keep) proper contribution documentation.

            Various written substantiation requirements apply for charitable contributions, depending on the amount and type of donation.  For example, a taxpayer will need records of all “cash” contributions (including payments made by check, credit card, or other funds transfer method).  Any single contribution of more than $250 must also be evidenced by a written acknowledgment (a receipt) from the organization that meets specific IRS requirements. 

            Accordingly, charitable organizations should ensure that their donors receive accurate and tax-compliant charitable receipts. Receipts need to include the following information:  the donee’s name; the total amount contributed; the contribution date(s); and whether the organization provided the donor with any goods or services as a result of their contribution (other than token items).  If any goods or services were provided, then the receipt should include a brief description and good faith estimate of their value. 

3)         Deductions are available for some volunteer expenses.

            Volunteers often incur out-of-pocket expenses while performing volunteer work for nonprofit organizations.  Certain expenses, such as those for transportation, lodging, meals, or the purchase of tangible materials for the organization, may be deducted if they are directly related to performing volunteer services, are unreimbursed, and are otherwise reasonable.  Expenses incurred for personal reasons are not deductible, however, such as a trip primarily for personal pleasure or for a spouse traveling with a nonprofit leader (unless the spouse has official work responsibilities).  For mileage that is tracked and documented, the “charity” rate of 14 cents will apply, which is substantially lower than the business rate applicable for paid staff.  Notably, no deduction is available for a person’s time spent volunteering for the organization. 

            The tax substantiation rules likewise apply for volunteer expenses, so nonprofits and volunteers should maintain reliable written records.  Donee organizations need to provide charitable receipts for any unreimbursed expense of more than $250.

4)         Non-cash contributions are subject to special rules.

            Special rules apply to certain contributions of property, such as donations of clothing or household items, vehicles, property subject to debt, inventory from a business, and patents.  Note that special receipting, tax reporting, and other restrictions apply to vehicle donations.  In addition, appraisals are required for certain types of donations over a specified dollar amount.  Overall, it is the donee organization’s responsibility only to provide a good faith estimate of a donated item’s value, and it is the donor’s legal responsibility to comply with applicable legal requirements for more accurately reporting donation values.  Check IRS Publication 526 for more information, or contact an attorney for specific guidance.

5)         Contributions must be made to qualified organizations.

            A contribution is tax-deductible only if made to a qualified recipient organization.  Qualified donees include US religious, charitable, and educational organizations (Section 501(c)(3) organizations), veterans’ organizations, certain fraternal societies, the federal government, and others.  Deductions may also be available for contributions to charities in other countries to a very limited extent, such as Canada, Mexico, and Israel.  Notably, donations to Section 501(c)(4) lobbying and advocacy organizations and to PACs are not tax-deductible. 

6)         Membership dues may be deducted in some cases.

            Membership dues to 501(c)(3) organizations may be deducted as charitable contributions in some cases.  Special rules apply depending on the benefits each member receives in exchange for his or her contribution.   Alternatively, to the extent that a business may pay for its employees’ membership dues, they may be deducted as a business expense on its corporate return without the 10% limitation for corporate donations.  For more information, see our firm’s separate article on membership dues.

7)         Note financial limits for deductibility.

            Two key limits apply to the availability of charitable deductions, as follows.    
           
            First, the maximum amount of one’s adjusted gross income that can be deducted is generally 50%, regardless of the actual amount of charitable contributions.    Contributions only to organizations described in section 170(b)(1)(a):  religious organizations, schools, hospitals, the government, public charities, and others qualify for this limitation.  Further, the maximum amount is lowered to 30% for contributions to private foundations, veterans’ organizations and qualified fraternal societies. Specific limits also apply for contributions of “capital gain” property.  (One silver lining:  any disallowed charitable contribution amount may be carried forward to future tax years.) 

            Second, and new for 2014 tax filings, the total of all itemized deductions (including the charitable deduction) when added together, may be further limited based on a tax filer’s adjusted gross income.  This limitation applies if adjusted gross income is more than $305,050 if married filing jointly or qualifying widow(er); $279,650 if head of household; $254,200 if single; or $152,525 if married filing separately.  Such individuals will need to complete an itemized deductions worksheet to determine their limits.

8)         Giving is good!

            The above-listed strategic tax considerations for charitable giving are critical for maximizing the financial benefit of charitable gifts.  But perhaps more importantly, the annual tax exercise of tallying up contributions and completing Schedule A provides donors with a wonderful opportunity to consider how they have meaningfully contributed to improving the world.  In short, taxes may be painful, but reflecting on one’s charitable contributions should feel great.  (And there’s always next year – more opportunities to help others through giving, to feel good, and to keep reducing one’s taxes through itemized deductions!)

            For more information regarding charitable contributions, related tax implications, and other legal issues affecting nonprofit organizations, please contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com or visit us on the web at wagenmakerlaw.com.

Tuesday, March 17, 2015

Of Online Fundraisers and Tax-Exempt Status


Do nonprofits that engage in online fundraising activity as their principal activity qualify for tax-exempt status under IRC Section 501(c)(3)?  The IRS recently said no to three nonprofit applicants, denying their requests for tax-exempt status.[1]  One applicant operated an online retail store, with profits from sales going to the charity of the buyer’s choosing.  The other two applicants obtained most or all of their funding by charging fees for their fundraising services to nonprofit organizations.

Many nonprofit organizations that engage primarily in fundraising activities have historically qualified for Section 501(c)(3) status, including “Friends Of” organizations that send charitable funds raised to foreign programs, nonprofits that raise money for special causes such as medical research, and organizations that operate “donor advised funds” (DAFs) by which donors direct payments to other charitable organizations.  What went wrong for the online fundraising organizations here? 

The three IRS decisions have sparked dialogue in the nonprofit tax arena about whether fundraising by itself constitutes a qualified charitable activity for purposes of 501(c)(3).  Here’s what all nonprofit leaders can learn from the IRS rulings. 

First Key Requirement:  Tax-Exempt Purpose

First, in all three denial letters, the IRS focused on the organizations’ substantial commercial activities, noting the absence of any other significant activities.  To qualify as tax-exempt under Section 501(c)(3), an organization must be primarily “organized” and “operated” for certain purposes, such as religious, educational, or charitable purposes.  The IRS asserts that raising money – by itself – is not inherently a religious, educational, or charitable activity.   Consequently, the IRS and courts have consistently ruled that organizations engaging primarily in commercial activities will not qualify for tax-exempt status merely because they turn over their profits to charity.

With respect to the online fundraising activities at issue here, the IRS recognized that the funds might ultimately be used for 501(c)(3) purposes.  The activities themselves, however, are commercial – namely, operating a fee-based online fundraising website or online retail store.[2]

The lesson for nonprofits here is simply: keep the main thing the main thing -- stay focused primarily on religious, charitable, or educational activities.  For example, the tax-exemption applicants could have structured their purpose and activities to be more directly engaged in charitable activities related to particular causes for which they shared philanthropic affinities.  The list is endless and full of possibilities.  But online fundraising, alone, won’t cut it.

It may have been helpful as well if the applicants had not charged fees to other nonprofits for processing donations, as designated by donors.  At least in the IRS’ view, such fees look fairly business-like.  The applicants may have been successful if they structured their arrangements so that all donations initially went to them first, as a grant-making organization (like the “Friends Of,” cause-related, and DAF organizations mentioned above).  The applicants could then have distributed the funds raised to the target nonprofits, minus costs for operating expenses for such efforts, without charging commercial-type fees.  The resulting donations to the recipient nonprofits thus would be identical financially, but with vastly different tax consequences for the nonprofit tax applicants.

Second Key Requirement:  Public Benefit

Second, the IRS determined that one applicant’s relationship with a for-profit entity involved a fatal “private benefit.”  Without exception, qualified 501(c)(3) organizations must be operated for public benefit rather than private benefit.  In tax parlance, the term “public benefit” means that the organization is broadly helping many (e.g., the American Cancer Society’s dedication to finding cancer cures, the ASPCA helping to prevent animal cruelty, or a local food pantry providing food supplies to needy families).  The term “private benefit” connotes an impermissible financial advantage garnered by an individual or company through the nonprofit, such as contractual relationships or other personal enrichment to the nonprofit’s detriment.  Substantial private benefit can destroy tax-exempt qualification.  Consequently, nonprofits that engage private companies or individuals for fundraising activities need to be particularly sensitive to potential private benefit problems.

In the IRS decision at issue, the tax-exemption applicant and a related for-profit entity operated a social networking website that allowed charitable organizations to create profiles where they could update potential donors with pictures and comments about their activities.  The for-profit company maintained these profiles, provided fundraising services to the organizations, and coordinated acceptance of donations.  In return, the for-profit company took a percentage of each donation as its fee.  The applicant created additional profiles for other nonprofit organizations that had never signed up for the for-profit’s services, facilitating donations to these organizations.  The applicant advertised that organizations could take better advantage of their profiles by “claiming” them in order to use the for-profit’s services.

In denying tax-exempt recognition, the IRS determined that substantial benefit resulted to the for-profit entity through such arrangements.  Essentially, it looked like the nonprofit was designed to funnel business to the for-profit.  Perhaps most detrimental was the fact that the applicant’s governing board consisted entirely of the three owners of the for-profit, including two who were married to each other.  The lack of an independent board created the perception – in the view of the IRS – that these individuals would make organizational decisions that privately benefit themselves, as opposed to the organization’s mission.

What are the lessons here?  Most obviously, keep your distance!  A nonprofit that seeks to enter into a long-term business relationship with a for-profit, through a contractual relationship or otherwise, ideally will have no overlapping directors, officers, or other key employees.  If any such relationships exist, the nonprofit board members should scrupulously apply the organization’s conflict of interest policy, determine a “fair” price for services in the organization’s best interests, and otherwise avoid any actual or potential for-profit control of the nonprofit.  In addition, the nonprofit should be continually attentive to other possible private benefits that could arise in connection with its charitable activities and therefore should be avoided.

Concluding Observations

The IRS’ refusal to recognize tax-exempt status in these cases may have been due to some aversion to innovative technology uses.  Or maybe it signals a conservative drift for the IRS, in finding such activities too commercial and otherwise problematic because of for-profit connections.  The legal analysis and final decisions issued in these rulings only apply with respect to the specific tax-exemption applicants, and are therefore not legally binding precedent to all exempt organizations.  However, the lessons set forth concerning the limitations of fundraising as an exempt activity are important for any organization interested in developing creative online platforms and activities to benefit public charities.    

For more information on charitable fundraising, establishing a charitable organization with substantial online activities, or other legal issues affecting nonprofits, please contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com or visit us on the web at wagenmakerlaw.com.




[1] Denial 201452017 (Dec. 26, 2014); Denial 201503016 (Jan. 16, 2015); Denial 201507026 (Feb. 13, 2015).
[2] In Denial 201503016, the IRS left open the possibility that an online retail platform with net profits given to charity could be eligible for 501(c)(3) status if all work were performed by volunteers.

Friday, March 13, 2015

IRS Reprieve on Health Insurance Premium Tax Penalties


On February 28, 2015, the Internal Revenue Service issued Notice 2015-17, providing temporary transitional relief for employers that offer pre-tax reimbursement or payment of premiums, deductibles, and co-payments to multiple employees for their individual health individual plans.  By way of background, the Affordable Care Act (ACA) wrought a drastic change for all employers providing such pre-tax benefits.  Despite such long-standing practice, the IRS and U.S. Department of Labor eliminated this option as part of its implementation of the ACA, making such benefit fully taxable to employees of all employers (not just employers subject to the ACA, based on having more than fifty full-time employees).

Thanks to this reprieve, employers will neither be required to pay otherwise applicable “market reform” excise penalties of $100 per employee (per day!), nor file accompanying IRS Form 8928 for legal noncompliance.  The applicable time period is from January 1, 2014 through June 30, 2015.  (Notably, the excise tax penalties do not apply to one-participant health plans, or for certain other benefits such as long-term care.)  Employers thus should not include such employee benefits in their employees IRS Form W-2s for such time periods.  Likewise, employees are not required to report such benefits as taxable income.   

What should responsible nonprofit employers do?  With respect to tax year 2014, employers should make sure that their IRS Form W-2s are accurate and do not include such health insurance benefits as taxable income.  Amended W-2s thus may be warranted.  Correspondingly, employers may wish to inform affected employees not to report such benefit as taxable income on their Form 1040s (or to amend their already filed returns accordingly).

With respect to 2015 and onward, it may be best to wait and watch for new legal developments.  On the other hand, this may be a good time to switch over to a group health insurance plan, to the extent they are affordable.  Another option beyond tax benefit considerations is for employees to become members of a health care sharing arrangement such as offered by Samaritan Ministries (www.samaritanministries.org). These health care sharing organizations appear be steadily growing, providing a cost-effective health insurance alternative for many families and individuals.

The regulatory reprieve is hugely welcome, but unfortunately does not provide much comfort for tax planning purposes since the temporary relief is effective only for a few more months.  According to the Evangelical Council for Financial Accountability and other sources, however, this employee tax issue is gaining traction within the halls of Congress, At least one bill has been proposed to eliminate the tax change – the Small Business Healthcare Relief Act (HR 5860).  Bigger changes may be afoot for the ACA, as both Congress and the US Supreme Court are currently grappling with different aspects of its legality and potential reform. 

Our law firm’s attorneys will continue to monitor and report on this important employee benefits area.  For further guidance on health insurance and related employment considerations, please contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com, or visit us at www.wagenmakerlaw.com. 

Tuesday, March 3, 2015

“Ministerial Exception” Upheld in Campus Ministry Context


Are campus ministries exempt from anti-discrimination employment laws, with respect to their religious leaders?  The federal Sixth Circuit Court of Appeals has emphatically said, “Yes.”  Its decision expands application of the “ministerial exception” doctrine that protects faith-based organizations from certain discrimination claims.  The decision also raises important questions concerning judicial application of the doctrine.

1.         Background to the “ministerial exception” – religious exemptions from certain discrimination laws.

The U.S. Supreme Court has long recognized the First Amendment’s protection for religious organizations to control their own internal affairs, including the selection of their religious leaders and other staff.  The following brief survey provides a framework for understanding the extent of that control, within the context of the Sixth Circuit’s new decision.

a.              Title VII, Section 702.  “Religious” employers may discriminate on the basis of religion.

Title VII of the Civil Rights Act of 1964 prohibits discrimination on the basis of an individual’s race, color, religion, sex, national origin, age, or disability.  42 U.S.C. § 2000e-16.  Section 702 of Title VII exempts religious organizations from Title VII's prohibition against discrimination in employment on the basis of religion.  This makes sense – a religious group will want to ensure that its clergy hold beliefs consistent with the group’s spiritual doctrines.  However, legal questions frequently arise concerning the application of section 702:  What is a “religious” employer?  Which employees are covered?

b.         Amos:  Section 702 extends to secular activities of religious employers.

In the landmark case of Corp. of Presiding Bishop v. Amos (1987), the U.S. Supreme Court affirmed that section 702 also applies to a religious organization’s secular workers and activities.  A religious group may require adherence to certain doctrines as a condition for employment for any position, not just positions involving religious activities.  Thus, a mosque could require Islamic faith as a condition of employment for a maintenance worker, for example. 

c.         A special case:  the “Ministerial Exception”

While Amos and section 702 deal with exceptions for religious discrimination, for “ministers” (a legal term of art), the exceptions to Title VII and other federal laws prohibiting discrimination are much broader.  In Hosanna-Tabor Evangelical Lutheran Church & School v. EEOC  (2012), the Supreme Court recognized the “ministerial exception.”  In Hosanna-Tabor, a parochial school teacher sued the church/school where she worked, but not under Title VII.  Instead the teacher sued the church/school under the Americans with Disabilities Act (“ADA”), claiming that she had been discriminated against based on her disability.  In holding for the church/school, the Court reasoned that, because it was a “religious group,” and because the teacher was a commissioned minister, with religious duties as part of her job, it was exempt from the teacher’s ADA discrimination claims.  According to the Court, the church had a right to govern its internal affairs, especially with regard to the hiring and termination of its “ministers.”  Because of this “ministerial exception,” the church/school’s decisions regarding her employment had to be left alone as a matter of First Amendment freedom of religion. 

In the wake of Hosanna-Tabor, two important questions remain about the application of the ministerial exception: 

(1)           What is a “religious group” such that it would be eligible for the exception for its ministers; and
(2)           Who is a “minister,” such that the religious group could claim the exception for the employee?

In the Sixth Circuit opinion below, the Court considered both questions.
           
2.         Sixth Circuit broadens application of ministerial exemption

            In Conlon v. InterVarsity Christian Fellowship,[1] the Sixth Circuit used the Hosanna Tabor framework to determine whether the ministerial exception applied to an employee in a campus ministry organization.  The court determined the religion clauses' ministerial exception barred the plaintiff’s federal and state employment-law claims.  In doing so, the court applied the Hosanna-Tabor two-part test as follows. 

            a.         Part 1:  The campus ministry was a “religious group.”

The Sixth Circuit pointed out that Hosanna-Tabor allows for the assertion of the ministerial exception when the employer is a “religious group.”[2]  The employer does not have to be “a traditional religious organization such as a church, diocese, or synagogue, or an entity operated by a traditional religious organization,”[3] and the exception “does not turn on its being tied to a specific denominational faith.”[4]  Rather, it may apply to any “religiously affiliated entity” whose “mission is marked by clear or obvious religious characteristics.”[5]  The exception has been applied to such organizations as a Jewish nursing home, a Methodist hospital, and a Christian campus ministry.[6]  The Conlon court pointed to InterVarsity Christian Fellowship’s name, mission, and purpose in determining that the exception applied.[7]

b.         Part 2: The campus spiritual director was a “minister.”

            Pastors, rabbis, imams, and clergy are not the only individuals who count as “ministers” for purposes of the exception.  In Hosanna-Tabor, the Supreme Court listed four factors that led it to conclude that the plaintiff-employee was a minister:

(1) The employee’s formal title;
(2) The substance reflected in that title;
(3) The employee’s own use of that title; and
(4) The important religious functions the employee performs for the church.[8]

The Court, however, did not state that all four factors had to be present for the ministerial exception to apply or that other factors are irrelevant.[9]  The Sixth Circuit, in its analysis, determined the presence of the first and fourth factors was sufficient.[10]  This meant that Ms. Conlon’s title of “spiritual director” or “Spiritual Formation Specialist” and her role in “cultivat[ing] ‘intimacy with God and growth in Christ-like character through personal and corporate spiritual disciplines’” qualified her as a “minister.”[11]

            It is not clear whether presence of a single factor or any other two factors would be enough to qualify an employee as a minister, nor that other factors are always irrelevant.  Nor is it clear that the Sixth Circuit’s test will be adopted by every circuit court.  What is clear is that the Sixth Circuit has widened its definition of “minister.” 

3.         Religious groups may not waive the exception.

            In Conlon, the employee claimed that InterVarsity could not claim the ministerial exception because it had waived its rights to invoke the exception.  Prior to Hosanna-Tabor, the Sixth Circuit had held such waiver possible.[12]  In the wake of Hosanna-Tabor, however, the Sixth Circuit changed its position.  The court stated, “[t]he ministerial exception is a structural limitation imposed on the government by the Religion Clauses, a limitation that can never be waived.”[13]

4.         The exception applies to state discrimination laws.

            Some states have specifically recognized the ministerial exception,[14] but others have not.  In Conlon, the plaintiff asserted state-based discrimination claims along with federal claims.  The Sixth Circuit held that the state-based claims were defeated by the federal First Amendment right.  As noted in Conlon, “The federal right would defeat any Michigan statute that, as applied, violates the First Amendment… Moreover, the Establishment Clause applies with the same force against the States through the Fourteenth Amendment, as does the Free Exercise Clause…”[15]  In other words, the federal right trumps any potential state claims. 

5.         Conclusion:  First Amendment protections still strong for religious employers.

            What does all this mean?  Generally speaking, it means that religious employers enjoy strong protection in employment discrimination cases involving those classified as “ministers.”  In Conlon, the Sixth Circuit may have broadened the definitions of both “religious group” and “minister.”  Applying Hosanna-Tabor, the Sixth Circuit further determined that the ministerial exception cannot be waived and that the exception functions as a defense to state discrimination claims as well.  For religious groups, this decision is a hopeful sign for protection of religious freedoms.

For more information about the applicability of employment laws to religious organizations or nonprofits generally, please contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com, or visit us on the web at www.wagenmakerlaw.com.


[1] 2015 WL 468170 (6th Cir. Feb. 5, 2015).
[2] Conlon at *3.
[3] Id., citing Hollins at 225.
[4] Conlon at *3.
[5] Id., citing Shaliehsabou v. Hebrew Home of Greater Wash., Inc., 363 F.3d 299, 310 (4th Cir. 2004).
[6] See Shaliehsabou, Hollins, and Conlon, respectively.
[7] Conlon at *3.
[8] Hosanna-Tabor at 708.
[9] Id.
[10] Conlon at *5.
[11] Id.
[12] See Hollins at 226.
[13] Conlon at *6 (emphasis added).
[14] See, e.g., Weishuhn v. Catholic Diocese of Lansing, 756 N.W. 2d 483, 497 (Mich. Ct. App. 2008).
[15] Conlon at *6-7, internal citations omitted.