Most developed nations have a good amount of charitable donations. Certain countries, like the US, are at the top of the charts for charitable giving. The USis the 2nd most charitable country in the world. According to the World Giving Index of 2016, the US country is highly dominant in terms of fundraising activity.
Given the amount of US charitable donations many non-US charities would like to access the large US charitable donation ‘market’. The US Internal Revenue Service (‘IRS’) discourages US donors in making non-US donations by not allowing the US donor to take a charitable tax deduction. In2017, Americans donated approximately $410 Billion to various charitable organizations. Usually, most donations are made to the US charities but there are few international charities also that received funds from US donors. The IRS has complex set of rules and regulations that determines a non-US charity’s eligibility to receive funds for US donors.
We consulted with Matthew Ledvina, who is a US tax expert advising non-US charities on the best way to access the US charitable giving market.
Non-US Charities with 501(c)(3) Status
If a non-US charitable organization has the 501(c)(3) status, then a US donor making a chartitable donation to the organization will receive a chartiable deduction. Generally, a non-US charity has to apply to the IRS for the 501(c)(3) status, or create a US-based branch of the non-US charity. There are a number of IRS requirements that a charitable organization needs to fulfill in order to obtain and maintain the status such as no involvement in political activities, works solely for public interest with no personal benefits, no income from unrelated businesses and regular reporting for US tax purposes.
A501(c)(3) charity have certain US tax exemptions, and arestill need liable to US tax taxes such as excise tax, employment tax, etc. Most US donors, whether a organization or individual, will insist on making a charitable donation only to the US branch of a non-US charity. This is largely because of the charitable deduction issue mentioned above.
Another way that non-US charities can follow to become qualified for US charitable deductions is the equivalency determination. This method becomes a more dominant choice in case a small number of donors whon want to provide funds to non-US charitable organizations. The equivalency determination is a process that determines whether the non-US charitable organization is an equivalent of a US public charity or not. The complex legal requirements and a significant amount of efforts required from both the donors and the organization make the equivalency determination a less preferable option.
The cost involved in the process of equivalency determination can go up to $10,000. In addition, donors have to prepare their own individual equivalency determination and in certain cases, the charitable organization might have to provide additional information, which complicates the process and makes it highly time-consuming for both the donor and the organization. However, there are certain tax experts that not only handle the equivalency determination process in an effective way but also lower the overall cost.
The US does have a large charitable donation market. Non-US charities who want to raise funds from the US will have to follow certain ways to become eligible. Usually, non-US charities either need to get the status of 501(c)(3) or prove itself equivalent to a US charity in order to raise funds from US donors.