Understanding Payments to Agents of Charitable Organizations
By Rebekuh Eley, CPA, MST
Many times local retail chains or restaurants ask customers to donate to a local charity with the payment of their restaurant bill or store purchase. Are these donations considered tax deductible contributions? The donation is not going directly to a charity. The donation is going to a business entity that will pay the donation to the charity on the customer’s behalf.
Payments to these businesses, or agents, in lieu of a direct contribution to a qualified Internal Revenue Code (IRC) 501(c)(3) organization, are considered tax deductible donations when paid to an agent of the organization. A valid agent of the charity may also provide the contemporaneous written acknowledgement to the donor as required to take a charitable contribution deduction. An entity that enters into this type of arrangement should comply with guidelines so a true agency relationship exists with the charity to avoid income treatment of the donations received on behalf of the charity and, to allow a charitable contribution tax deduction to the donor. These agency arrangements can also be mutually beneficial to both the charity and the business entity.
The Internal Revenue Service (IRS) has issued guidelines for entities to follow to assist with obtaining an agency relationship. According to Revenue Ruling 2002-67, the agency arrangement between a charitable organization and a person or entity acting on behalf of the charitable organization should first be established through a written agreement that is valid under the applicable state law. Not all contractual relationships will necessarily result in an agency relationship.
It is important to confirm that the state law recognizes the relationship established in the agreement as a valid agency relationship. The IRS further analyzed the terms and facts and circumstances of a written agreement to establish an agency relationship in PLR 200230005. The IRS noted the following characteristics that supported a valid agency relationship between a charity and a for-profit company receiving car donations on behalf of the charity.
- The written agreement between the charity and the company clearly established an agency relationship pursuant to certain state agency laws.
- The company was to act on the charity’s behalf and was subject to the charity’s control in the general performance of certain activities such as solicitation, acceptance, processing and the sale of donated property.
- The company could exercise some discretion but this was not in conflict with state law.
- The charity remained the equitable owners of the donated property until an authorized sale occurred.
- The charity bore the risk of accidental loss, damage or destruction of the donated property until the donated property was sold.
- The charity had the requisite degree of control and supervision.
- The company agreed to provide monthly accounting reports and weekly advertising reports to the charity.
- The charity reserved the right to inspect the company’s property donation program financial statements.
Under the written agreement, the company would pay certain costs and expenses, such as advertising and insurance. This fact did not preclude a determination that there is a valid agency relationship. Also, the fact that a related person to the company could purchase any vehicle at fair market value did not preclude the agency relationship provided the company acted in accordance with its fiduciary responsibility.
After an entity has established an agency relationship to receive contributions on behalf of a charity, the entity needs to evaluate if it is considered a charitable or professional fundraiser under state law. Many states impose additional registration and annual filing requirements on entities that are considered charitable or professional fundraisers.
After reviewing the requirements set forth by the Internal Revenue Service and various states, an entity may question the decision to establish an agency relationship. However, the agent will achieve a sense of community and purpose in helping the good cause of a charity while providing additional goodwill for its own business endeavors.
Please contact your Templeton advisor, John Templeton, with any questions you may have regarding nonprofits, [email protected] or 561-798-9988.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com