DAFs: Understanding eligible organizations
Donor advised funds (DAFs) may be an effective strategy for pursuing your philanthropic aspirations while saving tax dollars. However, it’s important to note that DAFs can’t be used to give to every organization, including private, non-operating 501(c)(3) organizations. In this article, we’ll break down the requirements governing 501(c)(3) organizations to help you better understand the rules for gifting.
Breaking down 501(c)(3) organizations
A 501(c)(3) refers to a tax-exempt, nonprofit organization. To be classified as such, these organizations must meet several requirements. In addition to ensuring that none of their earnings are given to any private shareholder or individual, these organizations cannot:
- Attempt to influence legislation as a substantial part of their activities
- Participate in any campaign activity opposing or supporting any political candidates
- Be organized or operated for the benefit of private interests
Private, non-operating 501(c)(3) organizations
501(c)(3) organizations can be either private or public. If private, the organization usually has a single major source of funding and is considered either non-operating or operating. Non-operating 501(c)(3) organizations represent the largest portion of private foundations and cannot be supported by DAFs. Here are a few important points about them:
- These organizations typically make grants to public charities.
- They can conduct their own direct charitable activities, such as by making grants to individuals and other organizations, and by awarding scholarships.
- They don’t have direct involvement with charitable activities and do not specialize in running their own charitable programs.
Private, operating 501(c)(3) organizations
In order for a 501(c)(3) organization to be considered a private, operating organization, it must undertake its own charitable activities and projects, as opposed to making grants to other charities. It should also dedicate about 85% of its investment income to funding their own charitable projects.
Public 501(c)(3) organizations
Public 501(c)(3) charities must fall under one of the following IRS codes:
- 509(a)(1): Refers to organizations with an active program dedicated to fundraising and receiving contributions from different sources, including the general public and governmental agencies.
- 509(a)(2): Applies to organizations that use the income from their activities to support their charitable purposes.
- 509(a)(3): Describes organizations that are dedicated to supporting one or more 509(a)(1) or (2) organizations. These organizations are further broken down into three types.
The types of 509(a)(3) organizations
509(a)(3) organizations are broken down into the following types by the IRS:
- Type I – A Type I organization is operated, supervised or controlled by its supported organization(s). The relationship between the supported organization(s) and the supporting organization can be compared to a parent-subsidiary relationship.
- Type II – A Type II organization must be supervised or controlled in connection with its supported organization(s). The relationship between the supported organization(s) and the supporting organization can be compared to a brother-sister relationship.
- Type III – A Type III supporting organization must be operated in connection with one or more publicly supported organizations. Since these organizations are not subject to the same level of control by their supported organizations, they must pass separate responsiveness and integral part tests.
- Based on the results of these tests, Type III organizations are further broken down into two other types: functionally integrated and non-functionally integrated. Organizations classified as non-functionally integrated are disqualified from receiving gifts from a DAF, while functionally integrated organizations are qualified to receive them.
Additional details about supporting organizations can be found on the IRS website. For any questions regarding your DAF, including the organizations you can contribute to, contact your advisor.