Here’s five critical things you should know about donating money through your business.
1. Decide if it’s worth it.
In a ideal world – where the only red tape we encounter in business is at ribbon-cutting ceremonies – companies could easily donate to charities or even set up their own philanthropic organization with minimal time, money or effort required. Fortunately, according to Mike Hoffman, director of administration for Kansas City’s Shamberg, Johnson & Bergman law firm, it’s not as bad as one might expect. “It can be accomplished very quickly and very inexpensively,” he asserts.
Established in 1999, the Shamberg, Johnson & Bergman Foundation is a private organization that the law firm utilizes as a vehicle for donating money to various local charities. “We believe it is especially important to help support organizations and institutions that play significant roles in enhancing the quality of life and promoting equality of justice in the Kansas City metropolitan area communities where our offices are located and where our families and our employees live and work,” Hoffman says.
2. Talk to an expert.
When the decision of starting a charity was made, the next step was to establish a charitable trust, the partners at Shamberg, Johnson & Bergman consulted with the Kansas City office of Lewis, Rice & Fingersh, a regional law firm that specializes in business-related legal matters, including estate and trust planning and administration. “We’re civil litigation attorneys, so we hired good business attorneys to set up the structure for us,” Hoffman says with a laugh.
Lori Gregory, an attorney with Lewis, Rice & Fingersh who routinely helps companies and families set up charitable trusts, says the most important step to setting up a trust is to speak with an attorney, accountant and financial advisor to identify the advantages and restrictions.
For mid-sized to larger businesses in particular, Gregory suggests they “form a committee of people who are charitably inclined, connected and committed. It will take some time to establish the mission of the foundation, plans for giving, grant-making processes, roles, etc., but once accomplished, it will create a roadmap for charitable giving by the foundation that will be worth the effort.”
3. Choose wisely.
The two most common charities are private foundations and donor-advised funds. Private foundations (which is what Shamberg, Johnson & Bergman has) offer more autonomy than donor-advised funds because the Board of the Community Foundation with which the donor-advised fund must be established has ultimate control over charitable grants. Also, private foundations are the best option for those wanting complete control over how their assets are invested.
However, starting a charity as a private foundation is more time-consuming and paperwork-intensive, according to Gregory. She says it takes at least nine months to get one set up. “I am a big proponent of donor-advised funds for most clients,” she admits. “Not only are the administrative costs much less, but they can be set up quickly and can have most of the same bells and whistles as a private foundation. Additionally, the amount necessary to initially fund a donor-advised fun can be next to nothing. A respectable donor-advised fund can be established with as little as $10,000. I would not recommend that a client fund a private foundation with less than $100,000.”
4. Reap the tax benefits.
For private foundations, tax deductions for cash contributions are 30 percent of the donor’s adjusted gross income; contributions of capital gain property, such as gifts of appreciated securities or real property, are 20 percent. Because donor-advised funds are technically considered public charities, they can get up to a 50 percent tax write-off for cash donations based on adjusted gross income and a 30 percent one for securities.
In order to stay on the IRS’ good side, private foundations must give away a minimum of 5 percent of its assets every year. This is not required of donor-advised funds. Private foundations, more so than donor-advised funds, could face some pretty severe penalties and excise taxes if the IRS perceives donors to be “self-dealing,” e.g., using a private foundation to buy tickets to a black-tie gala and then giving away the tickets to friends. “In some cases, such prohibited transactions can cause disqualification of the private foundation as a charitable organization,” Gregory warns.
5. Enjoy your legacy.
Private foundations allow “for a charitably inclined taxpayer to establish a charitable legacy in his or her name or in his or her family’s name,” Gregory says. “This legacy allows for the continued giving and involvement for future generations and allows the taxpayer and his or her family to be recognized for charitable gifts.”
If an individual wants to set up a private foundation as a legacy vehicle for his or her family, “make sure your kids are charitably interested and involved,” she advises. “Realize [that] after your death, unless there are restrictions on the charitable purposes of the private foundation, your children may have different charitable goals and interests which may not mirror your own. In some cases, the donor or donors may want to lock in certain charitable purposes to make sure charitable goals remain consistent thereafter.”
If the donor wishes to remain anonymous, it is easier to do so through a donor-advised fund than a private foundation, Gregory says. However, “some anonymity can be retained” for private foundations although annual IRS reporting requirements request some disclosure of funding sources and expenditures.