As Ebola appears poised to spread across the globe, many companies and individuals may wish to donate cash, securities, or tangible personal property to assist in the effort to stop the epidemic for worsening and/or to assist those individuals infected with Ebola, the families of such individuals, and/or the healthcare workers battling the virus on the front line. This article presents a summary review of some of the federal tax rules applicable to charitable contributions. Since much of the worldwide effort will be focused in Africa where Ebola has the greatest potential to ravage populations and metastasize to the rest of the world, a brief discussion of certain special rules applicable to donations made in connection with international campaigns are also discussed. Finally, certain rules applicable to donations for the benefit of individuals may be useful for those donors who wish to help members of a local community, such persons’ families, or even specific individuals or families.
An individual taxpayer is entitled to a charitable deduction for contributions to qualified charities (generally defined by the Internal Revenue Code as including Section 501(c)(3) organizations and churches) that are created or organized in the United States. A gift made to a charity created or organized in a foreign country (with the exception of Canada, Mexico and Israel, which are afforded special treatment under applicable treaty provisions) will not generate a charitable deduction. A contribution made by a donor to a U.S. charity which uses the funds to assist sick individuals abroad or to make grants to foreign charities for such purpose is deductible so long as the contribution is not specifically “earmarked” for use abroad and the board of directors of such U.S. charity has the bona fide discretion to utilize donated funds as it best sees fit in the fight against Ebola. If a donor desires to assist the efforts being made in one or more of the African countries currently battling Ebola, an individual should make donations to a U.S. charity or church that is active in such countries either through its programs or subsidiaries or through making grants to appropriate foreign charities.
Percentage Limitations on Deductibility of Donations
An individual taxpayer can deduct up to 50% of his or her contribution base (which is essentially adjusted gross income) each year for charitable contributions made to qualified public charities or up to 30% of such base for charitable contributions made to qualified private foundations. In addition, contributions of appreciated long-term capital gain property cannot exceed 30% of a taxpayer’s adjusted gross income for donations made to qualified public charities or 20% of such taxpayer’s adjusted gross income for long-term gain tangible personal property donations (i) not used in furtherance of the donee organization’s charitable purposes and activities or (ii) made to qualified private foundations. The donation limits applicable to S corporations and entities classified as partnerships and disregarded entities for U.S. federal income tax purposes are measured at the owner level. C corporation charitable contribution deductions are limited to 10% of the corporation’s otherwise taxable income. Each year, individual itemized deductions (which include charitable contribution deductions) are subject to a phase down based on 3% of the taxpayer’s adjusted gross income until, at their peak, 80% of such deductions are phased out. Generally, individuals (with use subject to the individual itemized deduction phase down each year) and C corporations have a five-year carry forward for amounts in excess of the percentage limitations.
Gross Amount Eligible for Deduction When Appreciated Property Involved
With respect to charitable contributions of appreciated property, the general rules are:
(i) stock with long-term capital gain is deductible at its full fair market value unless it is stock donated to private foundation that is not regularly traded on an established securities market such as the NYSE or NASDAQ (in which case it is deductible to the extent of the donor’s tax basis in such stock);
(ii) stock with short-term capital gain is deductible only to extent of the donor’s tax basis in such stock;
(iii) long-term capital gain tangible personal property asset is deductible at its full fair market value if it used by donee organization in furtherance of its valid charitable activities and purposes (otherwise it is deductible to the extent of the donor’s tax basis in such property);
(iv) inventory is deductible to the extent of the donor’s tax basis in such property, except for certain corporate contributions (see below); and
(v) ordinary income tangible personal property is deductible to the extent of the donor’s tax basis in such property.
Donors can claim contributions (whether cash or non-cash) in excess of $250 made to a donee organization on their tax returns only if the donor has a written acknowledgment of the donation from the donee organization by the time the donor files a tax return or by the time the donor’s tax return is due, whichever comes earlier. For charitable donations of non-cash gifts above $500, the donor also needs to file a IRS Form 8283 with the donor’s income tax return. Additional valuation and appraisal rules apply to non-cash donations in excess of $5,000 and $500,000, respectively, and generally tangible property transfers will need appropriate appraisals to establish value.
Special Enhanced Deduction for Inventory for Care of the Ill
For C corporations that make qualified contributions of inventory to qualified charities for the care of the ill, needy or infants, the charitable contribution deduction is the donor’s tax basis plus half of the gain that would be realized on the sale of the property (not to exceed twice the basis). Many U.S. charities are involved in attempting to provide medical supplies and protective gear to medical staff on the ground in Africa working to treat or isolate the Ebola outbreak. Healthcare companies and suppliers may want to take advantage of these special rules to maximize the benefit of their contributions and perhaps as leverage to increase their contributions. The charity must provide the donor corporation with a written statement
(i) that it is a Section 501(c)(3) organization exempt from U.S. federal income tax under Section 501(a) of the Internal Revenue Code and not a private foundation (other than an operating foundation) whose primary function is care of ill, needy or infants;
(ii) that describes the donated property and date of receipt; and
(iii) that represents that the property will be used in the care of the ill, needy or infants and will not be sold or exchanged for goods or services.
The U.S. charity can transfer the property to a non-U.S. charity if the non-U.S. charity meets the above requirements (other than the requirement, of course, that it be a U.S. charity). This mechanism will permit the U.S. charity to assist in the foreign efforts. The charity cannot be a mere conduit, and it must have the sole discretion to utilize such property domestically or wherever the charity’s board of directors determines it is best used. A donor can have an expectation of where a donation will be used; however, no assurances or agreements as to the location and use can exist. The value of the donation is the usual selling price of the inventory for the quantity contributed in the market in which the donor normally sells such property. If applicable, the donor must have complied with the Federal Food, Drug and Cosmetic Act at the date of contribution and for the immediately preceding 180 days.
Provision of Assistance to Infected Individuals in the United States
In the event that there are increasing incidents of Ebola within the United States, companies and individuals within affected communities in the United States undoubtedly will desire to provide assistance to individuals infected with the virus. Generally, persons wishing to help infected individuals while still netting some tax benefit from their contributions should make donations to an existing charity operating programs that provide aid to the class of people within the donor’s chosen geographic region impacted by Ebola. While donors choosing this route may have an expectation that the funds be directed to benefit a certain class of people infected with the virus, donors cannot formally or informally earmark their contributions for specific individuals and still have their contribution be eligible for a tax deduction.
Assistance (financial or otherwise) can be given directly to individuals; however, this method of helping those individual suffering from the illness will not yield a tax deduction for the companies and individuals providing the assistance. If a person desires to help an individual or a family directly or a community wishes to raise funds for an individual or family to assist in covering medical and other expenses, the laws of each state where this activity will occur need to be checked to ensure this type of assistance is structured properly. For example, Tennessee has laws specifically governing fundraising for a named individual suffering from catastrophic illness that, among other things, require any funds so raised to be placed in trust with a bank or trust company.
Employer-Related Disaster Relief and Emergency Hardship Funds
Depending on the severity of the Ebola outbreak and its direct impact on employees of a particular employer, an employer may desire to establish a separate employer-related disaster relief and emergency hardship fund to serve as an assistance resource for its employees affected by the Ebola virus and other catastrophic events. Should an employer choose to pursue this avenue, some key considerations for the fund to secure its own separate tax-exempt status are:
(i) for the fund to be largely supported by the employees rather than exclusively by the employer (most employers institute a matching program but only up to a certain cumulative maximum amount each year);
(ii) for the fund to be controlled by middle management and rank and file employees rather than senior executives of the employer; and
(iii) for the fund to have an indefinite life (i.e., the fund should not be created for a limited duration).
It is paramount that a fund of this nature meet these and certain other requirements for assistance received by affected employees from such a fund to qualify as nontaxable gifts.
For employers that already have established employer-related disaster relief and emergency hardship funds, amendments may need to be made to their existing funds to enable them to provide assistance to individuals infected with the Ebola virus.
Provision of Services by Hospitals and Other Healthcare Organizations
Generally, hospitals and other healthcare organizations may assist their individual patients consistent with their charitable care policies without doing anything further. It is anticipated, however, that if there is a significant Ebola outbreak in the United States, hospitals and other healthcare organizations may choose to provide assistance to infected patients that is beyond the scope of their the normal charity care policies. In such cases, facilities may need to obtain IRS advance approval of this broadened spectrum of assistance provided to individuals. Although expedited approvals may be requested from the IRS, there are no guarantees the IRS will grant a request for an expedited determination, meaning such applications should be filed sooner rather than later. If an organization waits until the need arises, the IRS response may be too slow to be of advance comfort or use.
Donors Must Exercise Great Caution
As in all cases of large disasters and human need, prospective donors should be careful. There will be large numbers of unscrupulous organizations and people attempting to obtain money or donations of valuable property and medical supplies for improper purposes. Even more than usual, the needs likely will be far in excess of the funds and property available, and such scams not only defraud the kind-hearted donors but also ultimately cost lives. The validity of a prospective charity to which a donor is contemplating making a donation may be verified through the Exempt Organizations Select Check section of the IRS’s website. Given that much of the current resources will be deployed in Africa, care also should be exercised by donors to ensure that funds are not being directed to terrorist organizations. Donors can vet potential charities with respect to these activities by visiting the Specially Designated Nationals List posted on the website of The Office of Foreign Assets Control of the U.S. Department of Treasury.