As a new school year begins, many parents in the region are unexpectedly finding themselves exhausted and overworked. They have been relentlessly raising money to restore or supplement sports, music and arts classes and programs that have been slashed by school districts struggling with tighter budgets. Parents from Monticello to Marlboro to Warwick have taken it upon themselves to organize, raise funds and get to work. Their creative efforts have included a “haircutathon” and using their own trucks and backhoes to build a football field. These efforts are ongoing, since a resolution to this budget crisis is nowhere in sight. This may well be a “new normal.”
As if the challenges of fundraising are not enough, the parents must also assure that their activities do not violate any applicable laws or expose them to unnecessary risks. Unfortunately these things can get complicated.
Fortunately, the basic purpose of all this activity is charitable. Support of education has long been recognized as a charitable activity. Also, education is broadly defined to include activities like music, arts and sports programs for students in a public school. This means that donations of money or property will entitle the donor to take a charitable tax deduction to the extent allowed by law. Note that donations of time or services will generally not entitle the donor to a tax deduction. So those parents who gave haircuts or excavated dirt most likely cannot claim a charitable tax deduction for those contributions. Donors looking for a charitable tax deduction should give money or property, not time or services. The haircutters and excavators have given non-deductible gifts.
One important issue is, who is the donee? Who receives the donations? If the money was going directly to the public schools, that would be a tax-deductible charitable contribution because public schools are recognized as a type of charity. However, the way most of the fundraising activities are designed, the donor’s money does not go directly to the school, but to some committee or group of parents. The involvement of this intermediary creates issues. If the immediate donee is not recognized as a tax-exempt charity, the donation will not be deemed a tax-deductible charitable contribution, but a non-deductible gift. There are a few possible solutions to this problem.
The committee or group could form a not-for-profit corporation and apply to the IRS for tax exemption as a charity. Forming a nonprofit is not nearly as quick or simple as it was years ago. New York State is known as a difficult state in which to form and operate a not-for-profit corporation, so much so that legislation, not yet signed into law, was recently passed to make a number of improvements. Obtaining tax exemption from the IRS is not so easy either. While forming a not-for-profit corporation is an option, it is a very substantial undertaking that requires a multi-year commitment from many people.
One simpler solution is fiscal sponsorship, an arrangement where a group allies itself with an existing tax-exempt charitable organization and that organization collects the donations for the group. Since the organization is a tax-exempt charity, donors get the receipt they need for a tax-deductible charitable contribution. The down side is that the organization usually charges a fee for its services, anywhere from 5% to 15% or even 20%. Some groups also worry about not exercising total control over their funds. An important issue is that the charitable purposes of the sponsor must include education of children in the arts or athletics, as the case may be. A humane society, devoted to protecting animals, could not qualify as the sponsor.
A variation on fiscal sponsorship is where a group could become a committee or subsidiary of a friendly and cooperative existing tax-exempt charitable organization. Again, the charitable purposes of the organization must include education of children.
In all of these scenarios, there are many issues to be negotiated and settled such as handling of funds, control, term of the agreement, termination and more. Both accountants and attorneys should be consulted in structuring these relationships.
Gary Schuster is Senior Counsel on the Business & Estates Team. He can be reached by phone at 845-778-2121 toll free or 845-778-2121 and by email.