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06 Nov

A Fresh Look at Donor-Advised Funds: What Every Nonprofit Should Know

Nonprofits and Donor-Advised Funds | Spire Group, PC

Donor-advised funds (DAFs) are growing in popularity, so it’s important that nonprofit leaders familiarize themselves with how to use DAFs as a funding source.

A recent report from the National Philanthropic Trust (NPT) estimates that nonprofit contributions from DAFs increased nearly 10 percent between 2015 and 2016. DAFs currently hold nearly $85 billion in assets nationwide. Additionally, DAF contributions to nonprofits with less than $5 billion in assets have increased at a faster rate. This signals that newer, smaller nonprofits can utilize DAFs as a growing source of funding.

The recently enacted Tax Cuts and Jobs Act (TCJA) might also increase DAF usage, since these funds may provide more tax advantages than the traditional charitable deduction. Since the TCJA doubled the standard deduction, fewer taxpayers will take the charitable deduction and may consider DAFs as an alternative donation tool.

Nonprofits can work directly with DAFs as the sponsoring organization or seek DAF contributions from a foundation that serves as the sponsoring organizations for a group of funds. Foundations solicit DAF contributions and distribute those funds to different local nonprofits. Working directly with a DAF may provide more flexibility, but community foundations reduce the amount of administrative work involved for the donor.

Be Your Own Sponsoring Organization

If your nonprofit serves as the sponsoring organization for the DAF, you have control over how the assets are used to fund your operations. However, you’ll be responsible for compliance with additional laws and regulations.

Under IRS rules, DAF transactions could be subject to excise taxes if they don’t stay within certain parameters. These rules are meant to ensure that donations are used for a truly charitable purpose and that DAF donors or advisors do not have influence over how funds are used. IRS scrutiny of DAF and nonprofit relationships has increased due to their popularity.

DAFs can be passed down to heirs, but that’s not a guarantee. So, as the sponsoring organization, be aware of how DAF assets might get passed on to family members or fund advisers.

Soliciting From Foundations

Just as your nonprofit solicits direct donations, it can also seek DAF funding through larger foundations. These include large philanthropic trusts and charitable offshoots of financial firms.

Accessing foundation funding requires establishing or maintaining a relationship with the foundation and seeking funding for projects that align with the foundation’s goals. You’ll then need to carefully track for those approved projects so that the foundation can review how its awarded funds were spent. On the plus side, relying on foundations to access the DAF market relieves your nonprofit of the administrative burden of overseeing the fund contributions.

DAF Tax Benefits

Because of the TCJA, the number of taxpayers using the standard deduction is expected to increase from 70 percent to 90 percent. With so many fewer taxpayers able to directly benefit from the charitable deduction, more donors may turn toward DAFs to make charitable contributions.

The new tax law also increased the annual adjusted gross income (AGI) cap for charitable contributions. Previously, a taxpayer could only donate up to 50 percent of their AGI in a given year, but now they can contribute up to 60 percent.

Keep your donors aware of these options if the changes to the charitable deduction impact their giving. DAFs also give donors an immediate tax break and a convenient way to donate to a charity when they receive a one-time financial windfall, such as an inheritance.

DAFs have already grown in popularity and the TCJA could fuel that growth. To best position your nonprofit in this environment, plan out your DAF strategy and carefully consider the administrative and tax consequences.

For questions on how to incorporate donor-advised funds into your funding strategy, please contact us at 732-381-8887.

About the Author

Kathleen Clayton, CPA Kathleen Clayton, CPA
Kathleen M. Clayton, CPA, is a principal at Spire Group, PC. Ms. Clayton’s professional practice of over 30 years has been concentrated on providing a wide range of services to the tax-exempt community. Ms. Clayton holds an MBA from Rider University and her BBS in Accounting and Management from Saint Bonaventure University. She currently is the Vice Chair of the Union County Educational Services Foundation. When she is not working, you can find Kathleen at the north end beach in Spring Lake.

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