Contact UsQ: Is my charity (as planned), legal? I plan to spend the donations to help the Philippines. (Far as I know "FAIK", this is OK.) The Q is about fund raising: The catalytic "Donate the Loan" process. Donors usually give from "cash on hand", resulting in sums far smaller than what the maximum allowed amount is. So: 1, the charity gives $1000 to the donor. He signs a doc that he will repay this from his tax refund. (provisions are made for loan forgiveness if catastrophic reduction in earnings occur.) .
2, He hands back the $1000 to the charity rep, and receives a receipt for a donation, to attach to his Form 1040 at tax year end reconciliation time. "FAIK", his taxes will be collected at the same rate, as if he never donated at all...)
3, Steps 1 & 2 are repeated as many times and with as many donors as possible.
4, At tax refund time, due to the donations being tax deductible (resulting in a refunds), the loans are remitted to the charity.
So: Legal?
3, Steps 1 & 2 are repeated as many times and with as many donors as possible.
4, At tax refund time, due to the donations being tax deductible (resulting in a refunds), the loans are remitted to the charity.
So: Legal?
TaxConnections Members... Answer This Question
Want To be One of Our Tax Experts? Register Here
Tax Professional Answers
Claire Schapiro E.A.
Lets look at each step.
# 1 The charity is giving to the taxpayer $1000.00- that is a no interest loan.
Check with an attorney on the legal deffinition of a real loan. I know there has to be a set payback date, Fair Market Interest rate, and if a short term loan there may be other conditions - I am not an attorney so I cannot specifically address the correct terms of this type of loan.
The taxpayer is going to pay back that loan from the taxpayer's tax refund.
# 2 The taxpayer is to donate that $1000.00 back to the charity - so in reality the charity is receiving back the same money they loaned to the taxpayer, but as a donation.
# 3 The taxpayer gets a receipt from the charaity for the $1000.00 that the taxpayer has returned to the charity as a 'donation'. -
The Charity is not 'out' the money as the original funds are back in their accounts. If the Taxpayer does donate from a refund the charity stands to gain an additional $1,000.00.
# 4 That receipt is then used by the Taxpayer to have a deduction on the Schedule "A" that may or may not reduce the taxpayer's AGI from line 38 on the 1040.
If the taxpayer does not exceed the standard Schedule "A" deduction the 'donation' to the charity has no impact at all on the taxpayer's reduction in AGI for taxable income.
If the donation does reduce the taxpayer's taxable income the impact would not gain back for the taxpayer the amount claimed as the donation.
#5 The taxpayer is then to repay the actual loan from the taxpayer's tax refund.
The taxpayer will be the looser in this plan. There is no profit for the taxpayer and this opens the taxpayer to an audit from the UnderPayment section of the IRS.
The charity will gain a 100% return on the 'loan' if the taxpayer did repay the loan from the tax refund.
The charity is not risking any funds as they get back the 'seed-money' immediately in the form of the so-called donation.
If this were my client I would never advise them to do this as most likely the IRS would look upon this 'donation' as not from the taxpayer's own funds and an attempt to committ a fraud to under-report actual income.
The Charity most likely would loose their non-profit status and face possible criminal charges.
Leave a Comment
568 weeks ago
# 1 The charity is giving to the taxpayer $1000.00- that is a no interest loan.
Check with an attorney on the legal deffinition of a real loan. I know there has to be a set payback date, Fair Market Interest rate, and if a short term loan there may be other conditions - I am not an attorney so I cannot specifically address the correct terms of this type of loan.
The taxpayer is going to pay back that loan from the taxpayer's tax refund.
# 2 The taxpayer is to donate that $1000.00 back to the charity - so in reality the charity is receiving back the same money they loaned to the taxpayer, but as a donation.
# 3 The taxpayer gets a receipt from the charaity for the $1000.00 that the taxpayer has returned to the charity as a 'donation'. -
The Charity is not 'out' the money as the original funds are back in their accounts. If the Taxpayer does donate from a refund the charity stands to gain an additional $1,000.00.
# 4 That receipt is then used by the Taxpayer to have a deduction on the Schedule "A" that may or may not reduce the taxpayer's AGI from line 38 on the 1040.
If the taxpayer does not exceed the standard Schedule "A" deduction the 'donation' to the charity has no impact at all on the taxpayer's reduction in AGI for taxable income.
If the donation does reduce the taxpayer's taxable income the impact would not gain back for the taxpayer the amount claimed as the donation.
#5 The taxpayer is then to repay the actual loan from the taxpayer's tax refund.
The taxpayer will be the looser in this plan. There is no profit for the taxpayer and this opens the taxpayer to an audit from the UnderPayment section of the IRS.
The charity will gain a 100% return on the 'loan' if the taxpayer did repay the loan from the tax refund.
The charity is not risking any funds as they get back the 'seed-money' immediately in the form of the so-called donation.
If this were my client I would never advise them to do this as most likely the IRS would look upon this 'donation' as not from the taxpayer's own funds and an attempt to committ a fraud to under-report actual income.
The Charity most likely would loose their non-profit status and face possible criminal charges.
Question Owner
Well, the relevant info given was: (#4)
If the donation does reduce the taxpayer's taxable income the impact would not gain back for the taxpayer the amount claimed as the donation.
Thank you.
Reply
568 weeks ago
If the donation does reduce the taxpayer's taxable income the impact would not gain back for the taxpayer the amount claimed as the donation.
Thank you.
Claire Schapiro E.A.
There are two relevant points. Not only would the taxpayer not gain back the funds, but this would be open to defense if the IRS looked at it.
You do not have a 60% or greater reason to find in statute support for this issue.
For the Charity, they could be audited as an attempt to inflate donations and 'other' income.
Unless you have non-profit training you may not have seen this issue. Non-profit books are not kept in the way most business books are kept.
The 'due to' "Due from" and 'general funds' accounts plus the restrictions on 'earned income' would come into play.
Reply
568 weeks ago
You do not have a 60% or greater reason to find in statute support for this issue.
For the Charity, they could be audited as an attempt to inflate donations and 'other' income.
Unless you have non-profit training you may not have seen this issue. Non-profit books are not kept in the way most business books are kept.
The 'due to' "Due from" and 'general funds' accounts plus the restrictions on 'earned income' would come into play.