July 19, 2017
When establishing a Disaster and Hardship Relief Fund there are regulatory and administrative best practices which sponsoring organizations should follow. From time to time, a fund sponsor may desire a program that would not comply with regulations, and so may choose a taxable alternative with fewer regulatory restrictions.
As a result, there are two main options. First is the non-profit, tax-exempt option which is cost-efficient but subject to regulation. The other option could have for-profit administration and is less cost-efficient, but also features less regulatory oversight.
The IRS is likely to classify a program run through a traditional vendor system as one where there is significant fund sponsor control. That classification means that grants which the relief fund provides to charitable class members in need will likely be taxable to those charitable class members. This does not mean that the outcome of helping charitable class members in need is impossible, it simply means that doing so is more expensive. Below, important features of the different options are discussed:
|Public Non-Profit Charity||Vendor|
|Field-of-interest agreement and memo of understanding||Standard service contract|
|Program and non-profit do not fulfill any legal obligation of the fund partner||Contract describes services and requirements that fund sponsor wants the vendor to perform|
|Charitable class is open-ended, large, and not operated to benefit particular individuals||The fund sponsor can include specific eligibility requirements for applicants|
|Grant dollars are not taxable to recipient charitable class members||Grants are taxable compensation to charitable class members|
|Contributions are tax-deductible||Contributions are likely not tax-deductible (think “pass-the-hat”)|
|Bottom line: A cost-effective and tax-efficient solution that complies with regulations and best practices||Bottom line: Much more expensive for each after-tax dollar, but allows fund sponsors more control over who receives grants|
These differences are significant, and need to be considered during the initial fund planning and start-up phases.