As a whole Americans are generous. In fact, total charitable giving in the United States for 2014 rose 7.1% over 2013 to an estimated $358.38 billion. The vast majority (72%) of that amount was given by individuals, followed by foundations (15%), bequests (8%) and finally corporations (5%). A large percentage (34%) of those donations (according to Steven MacLauglin of Blackbaud Index, an organization that tracks U.S. based charitable giving) is made in the last three months of the year.** This truly is the season of giving.
America’s spirit of giving is reinforced by the federal tax deduction available to taxpayers who make donations to entities that have been designated as tax-exempt under the Internal Revenue Code. The process of creating a tax exempt entity is governed by both state and federal law. The first step is to create an Arizona corporation whose purpose and mission fit within both the Arizona and federal requirements. Under the Internal Revenue Code, the Articles of Incorporation must state that the entity is “organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.” In addition, the Code requires that the Articles specifically prohibit any private benefit to the directors, members, trustees or any other private persons and provide that upon dissolution all of the entity’s assets will be distributed to another tax-exempt organization. Since these provisions are not in the nonprofit forms found on the Arizona Corporation Commission webpage, we do not recommend using those forms.
Once the Arizona non-profit corporation has been formed, the next step is to complete and file Internal Revenue Service Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Depending upon the nature of the entity, various addendums and supplements to the Application must be filed. The wording used on the Application, addendums and supplements is critical, particularly as it relates to the proposed activities, fundraising, staffing, policies and finances of the entity. In order to make the approval process proceed smoothly and avoid unnecessary delay and frustration, it is advisable to have someone who has experience assist you with the process. When the Application has been approved, the entity will receive a “Determination Letter” from the Internal Revenue Service. Thereafter, donations will be deductible by the donor and tax-exempt to the entity for federal and Arizona income tax purposes. The entity then will be able to tap into the spirit of giving at the holidays and throughout the year.
*Unless otherwise noted, statistics cited herein are taken from: Giving USA 2015: The annual Report on Philanthropy for the Year 2014, a publication of Giving USA Foundation, 2015, researched and written by the Indiana University Lilly Family Scholl of Philanthropy. Available online at http://www.givingusa.org.
**Charitable Giving Increases as Holiday Season Ramps Up, Eleanor Mueller, USA TODAY Network, November 11, 2014, http://usat.ly/1qCO6Hr.