Charitable Assistance: IRS Requirements
Last week we looked at Bridges for Heroes, an organization that provides assistance to veterans for health insurance and costs of health care not covered by insurance. We determined this type of help qualifies as charitable assistance because:
- Veterans constitute a “charitable class.”
- Recipients must show need by meeting eligibility requirements
But is the charitable assistance provided by Bridges for Heroes taxable income?
Michael E. Batts, Managing Partner of Batts Morrison Wales & Lee, P.A. explains:
“Need-based financial assistance is considered a gift under Section 102 of the Internal Revenue Code, provided that the recipient has not provided services in expectation of the assistance and provided that there is no expectation of future services (or any other quid pro quo) to or for the benefit of the provider. As such, need-based financial assistance is not reportable on Form 1099 or any other similar tax form. There are certain disclosure requirements in the Form 990 for grants to individuals, but the disclosures do not involve identification of individual grantees.”
Therefore charitable assistance to individuals is not taxable; rather it is considered a gift.
Form 990 Reporting Requirements
As Michael Batts notes above, the IRS requires certain information to be disclosed regarding charitable assistance. Information is required on Form 990, Schedule I for “more than $5,000 of aggregate grants and other assistance to or for domestic individuals” and also for “more than $5,000 of aggregate grants and other assistance to foreign individuals, or to domestic organizations or domestic individuals for the purpose of providing grants or other assistance to a designated foreign individual or individuals.”
Reporting on Form 990, Schedule I is also required for “grants and other assistance to any domestic organization, or to any domestic government.” We are focused here on assistance to individuals.
Specifically, Form 990 Schedule I asks:
- Does the organization maintain records to substantiate the amount of the grants or assistance, the grantees’ eligibility for the grants or assistance, and the selection criteria used to award the grants or assistance?
- Describe in Part IV the organization’s procedures for monitoring the use of grant funds in the United States.
Before you can answer these questions, you must have certain policies and procedures in place and keep certain records. What does the IRS require for record keeping?
IRS Record Keeping Requirements
The IRS requires organizations to keep records showing that grants and assistance to individuals are used for the intended charitable purposes. Publication 4221-PC, Compliance Guide for 501(c)(3) Public Charities, states:
“A public charity that makes grants to individuals must keep adequate records and case histories to demonstrate that the grants serve its charitable purposes. Case histories on grants to individuals should show names, addresses, purposes of grants, manner of selection and relationship (if any) that the recipient has with any members, officers, trustees or donors of the organization.”
Even eligibility of food pantry recipients should be documented. My Father’s House has a good example of eligibility criteria. Documenting eligibility can also help with audits by food bank organizations that supply food pantries.
Cash vs. Non-cash Assistance
Charitable assistance may be in the form of a cash gift or a non-cash gift.
Many organizations seek to improve accountability for use of charitable assistance by providing assistance in non-cash form. Examples are:
- Payment of rent, tuition and other expenses directly to the third party vendor
- In-kind gifts of food and supplies
- Gift cards to a grocery store instead of cash to buy food.
As noted above, Form 990, Schedule I asks organizations to describe their procedures for monitoring the use of grant funds. Providing non-cash assistance is a good way to ensure that charitable assistance is used as intended.
We’ve noticed a great deal of variation in how cash vs. non-cash assistance is reported on Form 990, Schedule I. Some organizations that provide assistance to individuals, such as homeless shelters, do not always complete Schedule I, though they may describe their programs and number of individuals served in Form 990 Part III – Statement of Program Service Accomplishments. Other organizations provide a lengthy list of assistance to individuals in Schedule I such as New Hampshire Catholic Charities on their 2016-17 Form 990, Schedule I:
- Fuel Assistance
- Food Assistance
- Medical Assistance
- Dental Assistance
- Emergency Shelter Assistance
- Rent Assistance
- Fire Assistance
- Flood Assistance
- Transportation Assistance
- Christmas Assistance
- Education Assistance
- Personal Items
- Funeral Assistance
- Emergency Home Repairs
- Car Repair
- Child Care
- Donated Kitchen Equipment
Interestingly, the amount reported for each of the above types of assistance was presented under the column for “Amount of cash grant” instead of “Amount of non-cash assistance.”
We have noticed a great deal of confusion over whether to classify assistance as “cash” or “non-cash.” The IRS instructions for Form 990, Schedule I provide little guidance on what constitutes non-cash assistance nor how to value it. The IRS instructions list as examples “medical supplies or equipment, pharmaceuticals, blankets, and books or other educational supplies.” The American Institute of Certified Public Accountants (AICPA), in feedback to the IRS, noted there are many kinds of assistance “where the recipient receives a financial benefit but never has access to cash.” They recommended listing more examples of non-cash assistance including “1) Financial aid, scholarships that are applied against a student’s tuition account 2) Gift cards to individuals for necessities such as groceries, household items, etc. 3) Payments to a third party vendor on behalf of an individual (e.g. paying the utility company for a family in need).” This is an interesting area for further exploration. How does your organization report assistance to individuals? We’d love to hear from you.
In providing assistance to veterans, Bridges for Heroes could pay health insurance companies and providers of medical services directly instead of giving cash to the veteran recipients. Combined with their requirement to prove need and the fact that they serve a charitable class, Bridges for Heroes has a solid plan for meeting IRS requirements to provide charitable assistance.