The COVID-19 pandemic has raised many questions about charitable giving and on the timing of required filings for many exempt organizations. Many of those questions relate to how a not-for-profit organization can give money to its employees who are impacted by current events, while other questions relate to the timing of filing obligations for exempt organizations.
In April, the IRS issued Notice 2020-23, which granted additional relief to taxpayers impacted by COVID-19. Notice 2020-23 amplifies Notice 2020-18 and Notice 2020-20 by postponing the due date of most forms and payments due on or after April 1, 2020, and before July 15, 2020—the Specified Period—until July 15, 2020.
This includes filings and payments falling within the Specified Period pursuant to a valid extension. Notice 2020-23 also expands filing relief to exempt organizations that were not previously covered by prior IRS guidance.
In addition to listing specific forms by name (990-T, 990-PF), Notice 2020-23 also provides that any person performing a “time-sensitive action” listed in Revenue Procedure 2018-58 is to be considered an “affected taxpayer” and granted relief within Notice 2020-23. Section 10 of Revenue Procedure 2018-58 contains an extensive list of elections and other “time-sensitive acts” for exempt organizations, including filings of Forms 990 Series, 1024, 1023 and 1023-EZ. These filings have also been postponed until July 15, 2020.
Questions on charitable giving are a bit more complex and can leave some advisors with questions of their own.
Question: The President declared COVID-19 a pandemic, significant enough to warrant an emergency declaration. Why is this important?
Answer: This declaration releases a vast array of federal programs to assist with response and recovery to impacted states and cities. Internal Revenue Code (IRC) Section 139, which was added as part of the Victims of Terrorism Tax Relief Act of 2001, provides that gross income does not include a “qualified disaster relief payment.” Accordingly, IRC section 139 allows employers to aid their employees, and others, on a tax-free basis.
Question: What is a qualified disaster relief payment?
Answer: IRC section 139 says that a qualified disaster relief payment includes any amount paid to or for the benefit of an individual:
1) To reimburse or pay reasonable and necessary personal, living, or funeral expenses as a result of a qualified disaster; 2) To reimburse or pay reasonable expenses incurred for the repair or rehabilitation of a personal residence or repair of its contents attributable to a qualified disaster; 3) By a person engaged in the furnishing or sale of transportation as a common carrier by reason of death or personal injuries resulting from a qualified disaster; or 4) If such amount is paid by a federal, state, or local government, or agency or instrumentality thereof, in connection with a qualified disaster to promote general welfare.
Question: Our company does not have a written policy in place specific to an IRC section 139 program. Is this required?
Answer: There is no requirement that an employer have a written policy to ensure that payments qualify for IRC section 139 treatment. Nevertheless, having a written policy in place governing disaster relief payments would make it more difficult for the IRS to question any payment made pursuant to the policy. Suggestions of items to include in the policy include the following:
- Description of the eligible class or group;
- List of expenses that would be eligible for payment (items described in section 139);
- Description of the method for reimbursement/payment and whether an application is required;
- Application deadline; and
- A per-employee maximum on grants (not required, but recommended).
Question: Our company would like to set up an employee relief fund to help our employees affected by COVID-19. How do we do this, and how quickly can it be done?
Answer: The IRS has very specific guidelines as to what must be done for employers to ensure that payments to employees qualify for IRC section 139 treatment.
After determining that the organization may meet the IRS’s initial qualifications, the organization needs to form a separate legal entity to hold its employee assistance program (typically done through an attorney). Once formed, the new employee assistance entity will need to electronically file Form 1023 or 1023EZ to apply for tax-exempt status with the IRS. Once submitted, the application may take six to eight weeks to be formally approved. Given the current environment, it is possible that this normal timeline may be delayed.
Question: If we have an employer-sponsored public charity, can we use the funds from the public charity to give to our qualifying employees?
Answer: The charitable-giving tax rules and IRS guidance do offer a path for employers to follow in providing disaster assistance to its employees using a public charity sponsored by the employer. Where certain requirements are satisfied, the employer-sponsored charity can bestow financial assistance awards to employees affected by a disaster. The IRS listed the following principal factors for its presumption of a successful, permissible arrangement:
- Even though the employer sponsors the charity, it cannot “exercise excessive control” over the charity.
- The charity must maintain a standard that it serves a large or indefinite “charitable class” of people. The charity achieves the “indefinite” aspect by dedicating an employee disaster-relief program for both current and future disasters.
- Selected employees should be chosen by a committee that is independent of the employer and the employees.
- Recipients must be chosen based on an objective determination of need.
In general, employer-sponsored public charities are entities that meet the requirements for tax exemption under IRC section 501(c)(3). Therefore, the donations to the charity will be deductible pursuant to the charitable deduction rules, and the donations received by the employees will be excluded from gross income.
Question: If we have an employer-sponsored private foundation, can grants be made from the private foundation to qualifying individuals?
Answer: Employer-sponsored private foundations can provide assistance to employees during times of disaster. Generally, the giving rules are much stricter for private foundations than they are for public charities; for employees affected by a federally declared disaster, however, private foundations can be a source of relief. Essentially, the private foundation must abide by the same factors highlighted for public charities, with the main difference being that the employer can have control of the private foundation. Also of note is that recipients of these disaster-assistance awards should not themselves be directors, trustees, or officers of the foundation. With all elements present, the employer-sponsored foundation can make distributions to employees without incurring excise tax for self-dealing and without burdening recipients with any taxable income
These same general rules apply for disaster relief provided by a private foundation not associated with an employer.
Question: What are the tax consequences if an organization gives directly to employees?
Answer: This is generally referred to as “direct giving.” Qualified disaster relief payments (see above for qualifications) are generally excluded from the recipient’s or employee’s gross income and are also deductible by the employer as salary expense. IRC section 139 does not specify a cap, but it does state that the payment must be “reasonable and necessary” and must not be for an expense reimbursable by the employee’s insurance. The organization is required to maintain adequate records as to disbursements that were made directly to the employee.
Question: Can contributions be made through a donor-advised fund directly to employees?
Answer: Employers can also help employees during times of disaster through an employer-sponsored donor-advised fund (DAF). Once a disaster has been given the official designation by the President as a qualified emergency/disaster, as has been done for COVID-19, the normal restriction of making payments directly to an individual through a DAF is lifted. According to the IRS, funds can be disbursed to employees based on the following criteria:
- The fund serves the single identified purpose of providing relief from a qualified disaster.
- The fund serves a charitable class.
- The recipients are chosen using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is “incidental and tenuous.”
- No payment is made to or for the benefit of any director, officer, or trustee of the sponsoring community foundation or charity, or member of the selection committee.
- The fund maintains adequate records to demonstrate the recipients’ need.
Question: Our employees and vendors want to assist some of our other employees who were directly affected by COVID-19. How can we facilitate this?
Answer: A not-for-profit organization can set up a separate bank account to collect funds from others and distribute to employees in need. However, these funds would not be considered charitable, and the donor would not receive a charitable deduction for such payments. These payments are still required to meet the qualifications noted above for a qualified disaster relief payment in order to be excluded from gross income by the recipient.
Alternatively, if an organization has already established an employer-sponsored public or private foundation, then contributions can be accepted through the foundation. Contributions would be deductible by the donor following the charitable contribution guidelines. For any contribution of more than $250, the foundation is required to send an acknowledgement to the donor.
If the organization does not have an established employee relief foundation, there are multiple crowdfunding options available to facilitate the collection of funds to give to those employees in need.
Question: Can an organization use crowdfunding to provide assistance to employees? What are the tax consequences?
Answer: These employer-funded or employee-facilitated crowdfunded websites are generally not exempt organizations. This means that contributions to these websites or organizations are not deductible as charitable contributions. These contributions are generally considered “gifts.” The receipt by the employee should also be considered a gift; therefore, excluded from gross income. GoFundMe reported that over 22,000 COVID-19 related fundraisers have been created on its platform in the past few weeks, including relief funds for Hollywood Support Staff, virtual tip jars for restaurant wait staff, and general COVID-19 relief funds.
It is important to note that some of these crowdfunding websites may charge a fee for their facilitation services.
These rules can be quite complex, and CPAs should be aware of the tax consequences of charitable giving to properly advise their clients.