Eventually enough is enough. You enjoy your business, but making money just isn’t as exciting as it used to be. You have enough.
But you love your business so much that you are not ready to give it up. So you begin to think about strategies to use that ongoing revenue in a way that makes a difference to others, not just you.
Sure, you can give something away to charity (and there are many out there that you will undoubtedly enjoy), but hey, you’re an entrepreneur. You are used to building your own thing. Why not take all of your experience building a profitable business and do the same in the non-profit world?
You have heard of something called a 501 (c) (3) entity. It’s a charity that people (like you) create often to give back to the communities to which they owe so much.
“A 501 (c) (3) is great when you’re doing good and want to turn taxable income into even more good,” said Tatiana Tsoir of Linza Advisors in Bedford, New York. “I prefer a 501 (c) (3) setup rather than giving donations from a for-profit company. Donations are subject to a number of deductibility restrictions. A 501 (c) (3) does more good and pays no (or only little) taxes so that you can do more good with your money. “
What are the “Deduction Limitations” and how could this affect your donation strategy?
You can donate money through your company or donate in person. However, the legal organization of your company plays a role in which way of giving is the most efficient.
“The 501 (c) (3) tax benefits are primarily for the individual taxpayer,” said Andrew Powell, Partner in Charge, DC Metro at Sikich, LLP in Alexandria, Virginia. “A C-Corporation is considered a separate entity for tax purposes and would receive limited tax benefits. The maximum benefit would be 10% of taxable income. “
“On the other hand,” Powell said, “transit company owners (S-Corps and partnerships) got a tax break on amounts that count as charitable contributions on their individual tax returns. The grouping of business charitable donations with individual donations and other separate deductions (z up to 37% of the amount donated. “
Regardless of whether you donate from your company or as an individual, you must first create the organization that will make your charitable wishes come true. Different states have different rules, so you’ll need to consult a knowledgeable attorney to learn how best to go about it.
“To form a 501 (c) (3), I would recommend filing a charitable organization (charter) with your state,” says Tsoir. “Many states only offer a company incorporation or state law ‘organization’, so find out what your state has first. There can be only one organizational option (no corporation) or one corporation, or both. There is no C-Corp or S-Corp option for a nonprofit organization as it generally does not pay taxes. In New York, for example, you have to register as a nonprofit from the start. There are two aspects of registration – the federal approvals and the state (s) registrations – that will be critical. Also, be aware beforehand that compliance (filing to administration will be the most important and powerful part of running a nonprofit) should be your priority from day one. “
Don’t forget the last sentence. Are you familiar with the tedious regulatory work that now comes up in your business? Well, double that up and you start getting the idea.
“As with any organization, there are specific annual filing requirements with the Internal Revenue Service and state and local governments,” says Powell. “Essentially, you would run two organizations, your current business and the 501 (c) (3).”
If you have made it this far then you are genuinely interested in entering a new phase of business. You probably think that a not-for-profit, non-profit organization is like a foundation. It is not.
“Both are tax-exempt organizations,” said Richard Mills of Marcoux Allen, attorneys in Ann Arbor, Michigan. “There are generally three sub-categories under this category: public charities (501 (c) (3), typically not-for-profit corporations under state law, although some are LLCs), privately owned foundations, and private foundations. Public charities serve a specific mission directly (feeding hunger, education, etc.). Private operating foundations do the same, but are organized as foundations. Private foundations serve as a channel. The donor donates to a private foundation, receives a tax deduction, and the foundation makes grants to public charities or government agencies. If donors want to actively participate in the community’s mission, they may want to set up a nonprofit corporation or private business foundation. The IRS requires a higher level of independence for these types of organizations. For example, not all board members may come from the same family, but the rules on deductibility are more liberal and there is generally little risk that the nonprofit will pay excise taxes, although this may be through UBIT (Unrelated Business Income Tax) if it has income achieved outside of its charitable purpose. A donor may have more control over a private foundation and be a financier rather than actually running a charity. In the case of private foundations, on the other hand, the deduction rules are more restrictive and the private foundations can be subject to consumption tax (as well as UBIT). A popular option for businesses and individuals is to set up a Donor Advised Fund (DAF), a fund held by a public charity or other sponsorship organization such as Fidelity. The donor can treat it like a private foundation, making funds available to public charities of their choice, but avoid the costs and complexities of starting their own private foundation. “
In addition to this legally technical difference, there are also tax and regulatory differences (and this could be more important to you).
“There are different deduction rules and also compliance rules,” says Tsoir. “For example, the contributions according to 501 (c) (3) are limited to 60% of the AGI (adjusted gross income, a changed total income figure in your personal tax return), while a contribution to a foundation is limited to up to 30% of AGI. So first a higher limit for a 501 (c) (3). The rules are just as strict, just a little different. And there is a higher level of discretion for someone who has a foundation, as you can distribute funds more freely. “
Tax deductions also come into play when you donate directly from your company.
“Because a C corporation is taxable as a standalone business, there is a different limit to the deductibility of charitable donations,” says Powell. “In most cases, the limit for a C corporation is 10% of taxable income. Since most other types of companies are either run-through companies (S-Corporation or partnership) or sole proprietorship, the deductibility of charitable contributions is taken into account at the individual level. “
As Tsoir mentioned, there are rules for distributing 501 (c) (3) contributions. The good news is you can start building a foundation. The bad news is, you can’t just build a foundation.
“A 501 (c) (3) is not required to be distributed, but it cannot be withheld indefinitely,” says Mills. “An operational non-profit corporation or an operational foundation must use the funds for its mission.”
So what do you think Are you ready to transfer your entrepreneurial skills to charitable projects? After all, at some point enough is enough. Plus, running a charity during your retirement years can keep you active in the same satisfying way as running a business.