A CPA Speaks Out: Why DAF Rules Annoy Me So Much
Hilary Crosby's CPA firm, Crosby & Kaneda, has audited and helped countless nonprofits and foundations in California and beyond. She is also a volunteer for many important community causes. But at the beginning of her career, she owned a hot dog restaurant that was named "Best Hot Dog in Boston." As a nonprofit auditor (and former hot dog maven), here are some of her thoughts on donor-advised fund (DAF) donations:
One of my early jobs was working as a bookkeeper for the ACLU. There I saw people working hard and with so much smarts and big hearts to help people and seek justice. I realized that I couldn't do what they did, but I could support their work through bookkeeping. They also encouraged me to get my CPA, which I did. I hated to see nonprofits spend too much of their charitable dollars on audits. Throughout my career, I've been proud to support so many people and causes through affordable audits and by basing our work on the values we share with our clients.
So it makes me angry to see charitable dollars going to waste.
Philanthropy Project readers probably already know that the Internal Revenue Code Section 501(c) describes 24 different types of nonprofits such as Black Lung Benefit Trusts, Cemetery Companies and Homeowner Associations. But I just want to talk here about 501(c)(3) organizations that are religious, educational, charitable, scientific or literary organizations that do nice things for people. These organizations help people, often by doing the things the government should be doing, or doing things to alleviate harm caused by big business. Such organizations aren’t just exempt from income tax themselves, but their donors don’t have to pay income tax on the money they give to them.
That feature was added to the tax code during World War I to encourage people to donate to help each other out because at that time the government was spending a lot of money to fight a war to end all wars. (It didn’t turn out that way, but you already knew that.)
I'm not talking about the couple bucks you toss into a guitar case of a street musician, or the money you give through a Facebook request. That’s pretty standard behavior and is included in the “standard” deduction that most people take on the annual tax filing. In 2019, over 86% of tax filers just took the standard deduction.(1)
Only 14% of taxpayers can now use the charitable tax deduction
That means that only 14% of people were able to take the financial tax advantage of making donations to nonprofits. They can give regular money or appreciated stocks and other investment products to a favorite charity. (Obviously not folks living paycheck-to-paycheck or only on social security income.)
Donors with extra cash (and a desire for an immediate tax deduction) can establish a donor-advised fund (DAF) inside a DAF sponsor (often a community foundation or financial investment firm). There are usually minimums to establish such a fund, which can be $5,000 or more. (Obviously not folks who are using their “excess” cash to pay for braces or tires or home care for an infirm parent.)
If such a donor has a family foundation (think Uihlein or Coors), they can shield up to 50% of their adjusted gross income from income tax by giving to their private family foundation, where they maintain control of when and where it goes to nonprofits.
Donor Advised Funds Sitting around
Donor-advised funds sit around waiting for the donors to advise the other charities where to give them. Private foundations have to pay out 5% of their equity each year, but that payout can include the foundation's rent, salaries, family travel expenses and so forth. In both cases, funds can sit in investment accounts for decades with the donors maintaining control.
And when they do make grants, donor-advised funds do not have to report where they made those grants. (These grants from DAF funds end up listed undesignated in the midst of a lengthy 990 report of their DAF sponsor.) They might designate their grants to charities they believe are doing good. Or they can make them to a university their children are applying to. Or to think tanks that develop legal arguments to support the donor's family business or financial interests.
Should wealthy individuals and families be able to get immediate tax deductions, then still control those funds—including deciding to give none or less than 5% out?
If I could vote on this, I’d vote NO.
