Disaster Relief: What Are the Options for Nonprofits?By Magdalena M. Czerniawski | September 27, 2021
In this age of COVID-19 and natural disasters, it is normal for people to want to help others. That help can come in many different forms, from looking after a family member or neighbor in need to donating to a local or national charity focused on humanitarian efforts. With social distancing, many businesses closing and/or laying off their workforce, and damage from natural disasters, a lot of people will not be able to pay their rent or mortgage payments, or buy food. Relief is available on the federal and state levels, but it is often too little, too late.
So what can be done in the meantime to help employees who have been affected by a natural disaster or COVID-related economic restrictions? While there may not necessarily be a legal obligation to assist these individuals, many corporations, partnerships and other businesses feel a moral, “corporate responsibility” to help.
Based on “corporate” and “social” responsibilities, what can companies do for their former or current employees? There are five primary considerations that an employer must think about when deciding how to help:
Do I attempt to find an existing charitable organization through which I can collect and distribute funds? This is often referred to as a “fiscal sponsor.”
Should I consider starting a not-for-profit in the name of the company, and do I want that entity to be a public charity or a private foundation? This is also an opportunity to consider a Donor Advised Fund (DAF), which normally cannot make grants to individuals except in times of national disaster.
What kind of assistance can I provide to either my employees or possibly a larger group?
What are my documentation and reporting requirements?
I may not want to set up or work through a charity. Can I still help my employees affected by a natural disaster, and if so, what are the tax implications to the company and the employee?
There are certain federal requirements that need to be met for the help to be most beneficial to all.
Beneficiaries must fall into a category of a “charitable class.” In this case, the charitable class would encompass all those affected by a national disaster such as Hurricane Ida or COVID-19. The opposite extreme is a company providing for a single individual (i.e., “earmarking”), which is probably not possible. There is a group in between that would be applicable to most companies.
Can a charitable class be as narrowly focused as employees of a single company affected by a natural disaster? Yes, if structured correctly. For example, current employees affected by a natural disaster would probably not be considered a charitable class. On the other hand, if you want to provide for current employees and all future employees affected by a national disaster, that would qualify as an “indefinite” class, which does meet the definition. Confusing? It gets more complicated than that. This is all predicated on the employer’s desire to receive a charitable contribution for the company and for the benefit of prospective donors.
As we explore the options further, the first decision is whether this will be a one-time effort or a vehicle with an indefinite life cycle.
The main consideration to using an already existing charity is that under federal tax law, such a charity generally has full control and authority of the funds in its possession. Typically, the money from a donating company would go into a separate fund, and a committee from the funding source can make recommendations as to how the money is used. From a federal point of view, the funds are under the control of the charity. State requirements can come into play at this point. In some cases, the states dictate that the funds must be used for the express purpose for which they are collected. Funds left at the end of the program belong to the sponsor. At no time can the funds go back to the company setting up the account.
Public Charity or Private Foundation
To take a charitable contribution under Code Section 170, the funds must be paid over to a charitable organization normally described under Code Section 501(c)(3), with no exceptions. The charity can be either a public charity or a private foundation. The private foundation is generally privately funded with one or two primary contributors such as the sponsoring company. That is not to say that others cannot contribute to a private foundation, only that it is funded on a very limited basis by others.
The public charity, on the other hand, has many contributors, favorable tax treatment under the current stimulus program and less scrutiny from the IRS. Private foundations are governed by a series of code sections with severe penalties if not used properly. Public charities are created for a specific exempt purpose and as long as they carry out that purpose, there is less IRS involvement. Public charities, to date, seem to be the vehicle of choice. The company, employees and even customers can donate. Public charities are relatively easy to create if you stay within the IRS guidelines.
As previously mentioned, it is also possible to fund relief through a Donor Advised Fund (DAF) for the benefit of an individual but only in the case of a national disaster. Similar to the fiscal sponsor, the funds belong to the DAF with the grantor serving in an advisor capacity.
Aid to Individuals
Generally, organizations can provide assistance in the form of funds, services or goods to ensure that victims have the basic necessities such as food, clothing, housing, transportation and medical assistance. This depends on the needs of the individuals and the resources available to meet those needs. Meeting the needs of an immediate disaster requires less individual record-keeping than prolonged assistance. For example, immediately following the disaster, sending out gift cards to a grocery store would be acceptable to meet urgent needs. On the other hand, if rent assistance was necessary, there would be an element of expenditure responsibility similar to that of a private foundation.
Aid to Businesses
The following is a list of the types of aid to businesses:
to aid individual business owners who are financially needy or otherwise distressed;
to combat community deterioration; and,
to lessen the burdens of government.
The key in assisting businesses is that the assistance must serve a charitable good rather than a private interest.
Documentation and Reporting Requirements
On an ongoing basis, documentation would 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;
how the recipients were selected;
the names, addresses and amounts disbursed; and
objective criteria on the composition of the selection committee and relationship to officers, directors or key employees.
A charitable organization that is distributing short-term emergency assistance would only be expected to maintain records showing the type of assistance provided, criteria for disbursement and purpose or intent of the distribution.
In some cases, an employer may choose to provide direct assistance to disaster victims rather than funneling assistance through a charity. In addition, sometimes an employer may provide assistance through a non-exempt fund established to receive contributions from the employer as well as employees. When disbursed, these funds may sometimes receive favorable tax treatment as well. Code Section 139 provides for special tax treatment of qualified disaster relief payments of a qualified disaster regardless of the source. Qualifying payments are not subject to income tax, self-employment tax or employment taxes even if the payments are made directly from an employer. It’s also important to monitor the IRS as well as FEMA websites to determine what areas they deem as covered disaster areas. That usually lessens the burden of documentation as another branch of government has already classified these areas as covered disaster areas.
There are many long- and short-term ramifications to the choices made by a company to provide assistance. The first and foremost consideration is to meet the immediate needs of employees or individuals affected by a natural disaster. There are many points to evaluate in making the decision as to how to handle the assistance. If you would like to assist your employees, seek appropriate support. We have touched on some federal considerations to think about when making a choice. There are a number of state issues that would need to be discussed as well, such as the need to register to solicit contributions in the respective states. Before moving forward with your plan, you should consider its impact on the company and the employees.
This article was originally published by Marks Paneth in May 2020 and was updated in September 2021.
About Magdalena M. Czerniawski
Magdalena M. Czerniawski, CPA, MBA, is a Partner at Marks Paneth LLP and a member of the firm’s Nonprofit, Government & Healthcare Group. With over 15 years of nonprofit industry experience, she provides tax services to a wide array of nonprofits, including charitable organizations, schools, social welfare organizations, affordable housing entities, professional associations, private foundations, healthcare organizations and hospitals. In addition to providing tax compliance services, Ms. Czerniawski also provides tax planning and advisory services.... READ MORE +