Traditionally, Americans have supported charities not only for tax breaks and a vague sense of “giving back,” but also for a variety of other financial, emotional and social reasons. Understanding what motivates donors and how their motivations vary across demographic groups can help your not-for-profit more effectively reach and engage potential supporters.

Money Matters
Asset protection and capital preservation traditionally have motivated many wealthy individuals to make charitable donations. And certain strategies — such as gifting appreciated stock or real estate to get “more bang for the buck” — may be particularly appealing to donors who make charitable giving a piece of their larger financial plans.

But high-income donors sometimes have less-obvious financial motivations, such as a wish to limit the amount their children inherit to prevent a “burden of wealth.” Warren Buffett, for example, plans to leave the vast majority of his wealth to charity rather than to his children. As he told Fortune, wealthy parents should leave their children “enough money so that they would feel they could do anything, but not so much that they could do nothing.” To appeal to these kinds of donors, you may want to offer to work with the entire family so that they can begin a multi-generational tradition of giving.

Social Considerations
Research by the Center on Philanthropy at Indiana University has found that younger donors — those between 20 and 45 — as well as wealthier and better-educated individuals are more likely to want to “make a difference” with their gifts. Those with lower incomes and a high school degree or less often donate to meet basic needs in their communities or to “help the poor help themselves.”

Donors of all stripes are motivated by the perceived social effects of giving. Research published in American Economic Review reported that donors typically gave more when their gifts were announced publicly.

Similarly, numerous studies have found that people are more likely to give — and to give in greater amounts — if asked personally, particularly if they know the person making the appeal. These donors may want to make an altruistic impression, and some may seek the prestige of being connected with a well-established and admired not-for-profit “brand.” Such individuals are more likely to buy pricey tickets to annual galas or join a not-for-profit’s board to meet and socialize with others in their socioeconomic group or business community.

Get — and Keep — Their Attention
There are probably as many motivations as there are donors, and most people have more than one reason to support a particular charity. To get — and keep — donors’ attention, perform some basic market research to learn who they are.

Fiscal sponsorships occur when an established charity provides a kind of legal and financial umbrella to a charitable project that lacks 501(c)(3) status. This type of arrangement can benefit both groups. But before agreeing to be a sponsor, be sure you understand how these arrangements work and the risks involved.

Mutually Beneficial
In a fiscal sponsorship, the 501(c)(3) sponsor is legally responsible for the charitable project. It acts as employer to the project’s paid workers and manages all of its funds. Donations and grants are made directly to the fiscal sponsor, thus qualifying their donors for a charitable deduction (if the donors itemize deductions and other applicable requirements are met).

It’s easy to see why small charitable projects seek fiscal sponsorships. Such relationships can provide much-needed infrastructure and fiscal management to a project. By making it possible to receive charitable donations, sponsorships can make more funds available. Plus, associating with an established charity can enhance the project’s credibility.

These arrangements benefit sponsors, too. A sponsorship can provide greater exposure for the 501(c)(3) organization, possibly resulting in new donors for established programs. When you choose a project that shares your mission and basic objectives, it can enhance your own program offerings with minimal monetary outlay. Although a sponsorship isn’t intended to be a source of income for the sponsor, nonprofits often charge a nominal fee to offset their overhead costs.

Prime Candidates
Projects that can best benefit from a fiscal sponsorship generally include those that are:

  • Too small to have staff or much infrastructure,
  • Temporary or periodic,
  • Waiting to secure 501(c)(3) status, but that want to operate sooner, or
  • Based outside the United States.

When you find a good candidate, make sure you thoroughly discuss each partner’s expectations and roles. Mutually agree on start and termination dates and decide which group will make decisions about what. Because nothing causes conflict like money issues, be sure to decide on the sponsorship charge (up to 10% is typical), how disbursements will be handled and who will handle audit and reporting requirements.

Both parties must understand the key responsibilities in the relationship. First and foremost, the fiscal sponsor is responsible because the project and its sponsoring nonprofit are legally one entity.

Consult Advisors
Keep in mind that any fiscal sponsorship involves some risk to your organization’s finances and reputation. So it’s important to discuss your plans with legal and financial advisors before entering into one of these arrangements.

A tried-and-true year end tax strategy is to make charitable donations. As long as you itemize and your gift qualifies, you can claim a charitable deduction. But did you know that you can enjoy an additional tax benefit if you donate long-term appreciated stock instead of cash?

2 Benefits From 1 Gift
Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you may be able to enjoy two tax benefits:

  1. If you itemize deductions, you can claim a charitable deduction equal to the stock’s fair market value, and
  2. You can avoid the capital gains tax you’d pay if you sold the stock.

Donating appreciated stock can be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.

Stock vs. Cash
Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 37% and your long-term capital gains rate is 20%. Let’s also say you itemize deductions.

If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.

By instead donating the stock to charity, you save $5,366 in federal tax ($1,666 in capital gains tax and NIIT plus $3,700 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,700.

Watch Your Step
First, remember that the Tax Cuts and Jobs Act nearly doubled the standard deduction, to $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly. The charitable deduction will provide a tax benefit only if your total itemized deductions exceed your standard deduction. Because the standard deduction is so much higher, even if you’ve itemized deductions in the past, you might not benefit from doing so for 2018.

Second, beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 60% and 30%, respectively, for cash donations).

Finally, don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

Minimizing Tax and Maximizing Deductions
For charitably inclined taxpayers who own appreciated stock and who’ll have enough itemized deductions to benefit from itemizing on their 2018 tax returns, donating the stock to charity can be an excellent year-end tax planning strategy. This is especially true if the stock is highly appreciated and you’d like to sell it but are worried about the tax liability.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back once again with Annjeanette Yglesias, one of our tax managers and a member of our not-for-profit team. Annjeanette, welcome back to the Playbook.

Annjeanette: Thanks, Jen. It’s nice to be here.

Jen: So, we’ve talked before about the Donor Bill of Rights and how it really wasn’t a legal thing for nonprofits to follow, but I know there’s organizations out there that are considered “watchdogs.” Can you tell us a little bit about some charity watchdogs?

Annjeanette: Charity watchdog organizations are out there, and they’re basically on the Internet and such. And they’re out there to provide donors information. A lot of nonprofit organizations have tax filings and financial information that’s already made available to the public, and these watchdog organizations basically make that information available in one spot for donors to look at.

Jen: So, kind of like a search engine for charities?

Annjeanette: Basically yes.

Jen: What are the main charity watchdogs that people typically go to?

Annjeanette: There’s three that come to mind. So, first of all, there is Charity Navigator, and Charity Navigator is pretty popular. They basically collect tax returns, copy of tax returns and financial information, as well as annual reports that nonprofit organizations might have on their websites. And what they do is they take that information, analyze it and provide a star rating. So, they have a star rating system, and they have a formula that goes behind their star rating system.

And then there’s Charity Watch; Charity Watch is very similar. They get financial information, tax return information that’s already out there to the public collected, and they have their own method of rating organizations and they provide a letter rating A through F.

And then there’s GuideStar; GuideStar doesn’t necessarily analyze a nonprofit organization’s performance. What they do is they’re just a repository for information: the tax returns, financial reports, annual reports, things like that. But what they do have is a seal of transparency rating that they provide each organization based on how much information the organization itself voluntarily provides to customers.

Jen: So, you’ll want to kind of maybe look at all three but then also do your own due diligence as just part of when you’re making a decision whether or not to contribute to a not-for-profit.

Annjeanette: That’s correct. The important thing for nonprofit organizations to know is that these watchdog organizations are out there, and so, it’s important for the nonprofits to understand what they’re looking at, what the grading methodology is and what the donors are seeing from that aspect of it. That way when they field questions from potential donors, potential supporters they’re aware of what’s out there, and they can respond appropriately.

Jen: Well, that’s good to know. Perfect, we’ll get you back to talk a little bit more.

Annjeanette: Sounds good.

Jen: To learn more about how PKF Texas can help your not-for-profit organization, visit PKFTexas.com/notforprofit. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

The Houston Business Journal published an article on their website co-authored by PKF Texas Tax Practice Leader and Director, J. Del Walker, CPA, and Tax Manager, Annjeanette Yglesias, CPA. The article discusses the differences between a private foundation (PF) and the donor advised fund (DAF), which impact family philanthropy efforts.

So, what are the differences? Walker and Yglesias primarily define the two terms:

“A private foundation is an IRC Section 501(c)(3) organization that has one primary source of funds, typically either from an individual/ family but may also be a business. This discussion focuses on private non-operating foundations, otherwise known as grant-making foundations.

A donor advised fund (DAF) is a separately identified fund or account that is maintained and operated by an IRC Section 501(c)(3) organization (public charity). Once the donor contributes to the DAF, the managing organization legally controls the funds going forward. The donor only maintains advisory privileges with respect to amount and recipient of distributed funds.”

The co-authors then present various things to consider when deciding which is better suited for donors and philanthropic goals:

  • Formation,
  • Administrative considerations,
  • Tax implications to donors
  • and more.

For the full article, visit www.bizjournals.com/houston/news/2018/10/09/family-philanthropy-tips-on-private-foundation-vs.html

To learn more information, contact J. Del Walker (dwalker@pkftexas.com) or Annjeanette Yglesias (ayglesias@pkftexas.com).

If you’re charitably inclined and you collect art, appreciated artwork can make one of the best charitable gifts from a tax perspective. In general, donating appreciated property is doubly beneficial because you can both enjoy a valuable tax deduction and avoid the capital gains taxes you’d owe if you sold the property. The extra benefit from donating artwork comes from the fact that the top long-term capital gains rate for art and other “collectibles” is 28%, as opposed to 20% for most other appreciated property.

Requirements
The first thing to keep in mind if you’re considering a donation of artwork is that you must itemize deductions to deduct charitable contributions. Now that the Tax Cuts and Jobs Act has nearly doubled the standard deduction and put tighter limits on many itemized deductions (but not the charitable deduction), many taxpayers who have itemized in the past will no longer benefit from itemizing.

For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households and $24,000 for married couples filing jointly. Your total itemized deductions must exceed the applicable standard deduction for you to enjoy a tax benefit from donating artwork.

Something else to be aware of is that most artwork donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal.

IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.

Finally, note that, if you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.

Maximizing Your Deduction
The charity you choose and how the charity will use the artwork can have a significant impact on your tax deduction. Donations of artwork to a public charity, such as a museum or university with public charity status, can entitle you to deduct the artwork’s full fair market value. If you donate art to a private foundation, however, your deduction will be limited to your cost.

For your donation to a public charity to qualify for a full fair-market-value deduction, the charity’s use of the donated artwork must be related to its tax-exempt purpose. If, for example, you donate a painting to a museum for display or to a university’s art history department for use in its research, you’ll satisfy the related-use rule. But if you donate it to, say, a children’s hospital to auction off at its annual fundraising gala, you won’t satisfy the rule.

Plan Carefully
Donating artwork is a great way to share enjoyment of the work with others. But to reap the maximum tax benefit, too, you must plan your gift carefully and follow all of the applicable rules.

Americans gave unprecedented sums to charity in response to the devastating hurricanes last year. Large organizations, such as the American Red Cross, were equipped to handle the huge influxes of donations. However, some smaller charities were overwhelmed. Although it may seem like an unlikely problem, not-for-profits need a plan to handle a potential outpouring of support.

Know What’s Normal
Perhaps the biggest lesson to learn from recent disasters is to always have an expansion plan in place. When the influx of online giving reached critical mass, many organizations found that their websites overloaded and went offline. Their sites had to be moved to more powerful servers to handle the increased traffic.

Keep track of “normal” website hits, as well as the numbers of calls and email inquiries received, so you won’t be caught off guard when you start to surpass that amount. Also, know your systems’ ultimate capacity so you can enact a contingency plan should you approach critical mass.

Mobilize Your Troops
Having an “early warning system” is only one part of being prepared. You also need to be able to mobilize your troops in a hurry. Do you know how to reach all of your board members at any time? Can you efficiently organize volunteers when you need extra hands quickly? Be sure you have:

  • An up-to-date contact list of board members that includes home, office and mobile phone numbers,
  • A process, such as a phone tree, so you can communicate with the board quickly and efficiently, and
  • One or more emergency volunteer coordinators who can call and quickly train people when you need them.

Also conduct a mock emergency with staff and volunteers to learn where you’re prepared to ramp up and where you’re not.

Build Relationships
A surge in donor interest may mean a surge in media attention. While it might be tempting to say, “not now, we’re busy,” don’t pass up the opportunity to publicize your organization’s mission and the work that’s garnering all the attention.

In most cases, the immediate surge of interest eventually wanes. Before that happens, not-for-profits should start building lasting relationships with new donors and media contacts. Inform them about the work your organization does under “normal” circumstances and suggest ways to get them involved.

Russ:  This is PKF Texas Entrepreneur’s Playbook.  I’m Russ Capper, this week’s guest host, and I’m coming to you from the Gulf Coast Regional Family Forum, and my guest is Renée Wizig-Barrios, Senior Vice President and Chief Philanthropy Officer of the Greater Houston Community Foundation.  Renée, welcome to the show.

Renée:  Thank you, Russ. Good to be here.

Russ:  You bet.  So tell us about the Greater Houston Community Foundation.

Renée:  Well the Greater Houston Community Foundation is a public charity, and we work with high net-worth individuals, families, businesses and foundations to help them make the most of their philanthropy.  We have been around Houston for more than 21 years as a non-profit, and we have the joy of working with people to make Houston a more vibrant place through really generous acts of philanthropy.

Continue Reading How the Greater Houston Community Foundation Makes Charity Dollars Productive