Unfortunately, the weather has not been kind to U.S. residents in the last few weeks. Recent natural disasters have many charities looking for ways to assist in the affected areas.
At the date of this publication, the U.S. has declared Hurricanes Harvey, Irma, and Maria as qualified disasters. For organizations for which disaster relief is one of the exempt purposes recognized by the IRS, this is merely a continuation of the organization’s programs.
However, what if disaster relief is not the organization’s recognized exempt purpose? Good news! Such organizations can still help victims directly, without permission from the IRS. However, they must report the new activity on their annual returns (Form 990, Part III, Line 2).
If a new charity is set up, even by an existing organization, it must apply for exemption from the IRS, as discussed below.
How Your Organization Can Help
When looking into long-term goals to help with the aftermath of crises, setting up a new charity could be beneficial. In this case, an exemption application (Form 1023) must be filed with the IRS. In some cases, the application can qualify for expedited IRS processing, if the new charity will benefit victims of a disaster and has a compelling reason for expeditious handling.
An application will not be expedited solely because the organization provides disaster relief. The applicant must also show that that it is meeting an immediate need of disaster relief, or providing aid to emergency hardship victims. The application must also demonstrate that their ability to provide immediate assistance to such victims will be adversely affected, in a material way, if the application is not reviewed speedily.
Requesting Expedited Processing
The request for expedited processing must be made in writing and the applicant must fully explain its necessity. Granting expedited processing is at the discretion of the IRS. Expedited handling is not available for a Form 1023-EZ. Though, arguably, Forms 1023-EZ would not need expedited handling, as they tend to be processed relatively quickly.
Documentation accompanying the application and user fee should include:
- The compelling reason for processing the application ahead of others;
- A brief description of the disaster and details regarding how the organization will provide relief;
- An explanation of the immediate need for the specific disaster relief services the organization provides;
- 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 affect the organization’s ability to operate and provide relief;
- An example of any significant business emergency, demonstrating how the emergency will significantly affect the applicant’s ability to operate and explaining how expediting the application will enable the applicant to avoid emergency;
- A statement explaining any other anticipated consequences, should the expedited process be denied; and
- A date an exemption letter is required, if applicable.
While this expedited process may hasten a new organization’s abilty to receive deductible contributions and provide aid, providing aid through an existing disaster relief organization could allow for more immediate and efficient administration of the relief program.
Employer-sponsored charities can also assist victims of a qualified disaster, including employee victims, in areas affected by the hurricanes. Exempt charities must be operated primarily for a public purpose. Thus, the class of beneficiaries must be large enough for the activity to provide public benefit, rather than private benefit.
To make sure that the class of charitable recipients is large enough, the IRS recommends that the charitable organization create an open-ended relief program that includes employees affected by not only the current disaster, but also any future disaster and emergency hardship situations.
These charities should exercise the same due diligence when providing relief, as discussed above, and should have an independent selection committee to select the relief recipients. If an independent selection committee is not an option, adequate procedures must be in place to ensure that any benefit to the employer is incidental and tenuous.
What is Qualified Disaster Relief?
Qualified disaster relief includes amounts paid to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred because of a qualified disaster; or amounts paid to repair or rehabilitate a personal residence, or repair or replace contents damaged or lost due to a qualified disaster.
Disaster relief organizations can provide short-term emergency assistance or long-term aid to supply basic necessities such as food, clothing, housing, transportations, medical assistance, and trauma counseling.
Due diligence must be practiced to assure that persons receiving assistance are in need. An objective evaluation of the need is required.
Note that the IRS distinguishes between those who are merely victims of a disaster and those who actually need relief and resources. In the immediate aftermath of a disaster, a charity can attend to a victim’s urgent needs without regard to the victim’s financial means.
However, the charity must still document and maintain records of this type of assistance. As the urgency passes, charities should conduct individual financial needs assessments before continuing to give individual aid.
Organizations Should Maintain Adequate Documentation
Relief programs require appropriate and adequate documentation. Such documentation should be maintained for the same retention period as all other documentation used to support positions on tax returns. Documentation should include:
- A complete description of the assistance provided;
- Costs associated with providing the assistance;
- The purpose for which the aid was given;
- The charity’s objective criteria for disbursing assistance under each program;
- How the recipients were selected;
- The name, address, and amount distributed to each recipient;
- Any relationship between a recipient and officers, directors or key employees of or substantial contributors to the charitable organization; and
- The composition of the selection committee approving the assistance.
However, if an organization is providing short-term emergency assistance, such as distribution of blankets or hot meals, they would only be expected to maintain records showing:
- Type of assistance provided;
- Criteria for disbursing assistance;
- Estimated number of victims assisted (individual names and addresses are not required)
- Charitable purpose intended to be accomplished; or
- Cost of aid.
We encourage you to consult your tax advisor if you have questions regarding providing disaster relief, or contact us.
Kayla Harmon is a Tax Associate at Clark Nuber.
© 2017 Clark Nuber PS. All Rights Reserved.
This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.