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Frequently Asked Questions Regarding Nonprofits’ Options to Assist Community Members and Employees Impacted by Wildfires

CATEGORY: Special Bulletins
CLIENT TYPE: Nonprofit
PUBLICATION: LCW Special Bulletin
DATE: Jan 17, 2025

With wildfires devastating the Los Angeles area, nonprofits that do not normally engage in disaster relief are exploring immediate ways to support their affected employees and community members.  This has led to pressing questions about using the nonprofit’s resources, including questions about providing grants of direct financial aid, and about helping the broader community fundraise.  These questions pose nuanced and significant issues for nonprofits.  They must consider their tax-exempt status under Internal Revenue Code section 501(c)(3), the regulation of charitable solicitations, whether providing direct aid is consistent with their Articles of Incorporation, and more.

The following frequently asked questions provide general guidance about issues related to nonprofits engaging in charitable activity related to disaster relief.  However, these issues are very fact specific and determining whether a nonprofit’s proposed actions comply with legal requirements will depend on the circumstances.

Can a Nonprofit That Does Not Engage in Disaster Relief Make a Charitable Contribution to Another Nonprofit Organization Supporting Wildfire Relief Efforts?

Yes.  A nonprofit can use its unrestricted funds to donate to an existing disaster relief organization.  The Internal Revenue Service (“IRS”) has advised here that organizations with 501(c)(3) status that do not themselves engage in disaster relief efforts may still give money to other 501(c)(3) entities as a way to contribute to disaster relief efforts.

Can a Nonprofit That Does Not Engage in Disaster Relief Solicit Money from the Community to Contribute to Disaster Relief Organizations?

Yes, but nonprofits are cautioned that doing so is not without risk.  For example, it will create a restricted fund.  A restricted fund is money given to a nonprofit that must be used only for a specific purpose chosen by the donor.  California law imposes strict duties on nonprofits to use restricted funds solely for their restricted purposes.  Accordingly, if a nonprofit takes in donations from community members, promising to donate all of those funds to a disaster relief organization, the nonprofit must follow through on pooling those funds and making that larger donation.

Can a Nonprofit Solicit Money from the Community to Contribute Directly to Those Impacted by the Fires?

Yes, but if a nonprofit represents to the community that they can donate to the nonprofit so the nonprofit can then administer its own program of making individual grants or providing other assistance directly to those impacted by the fires, that would also create a restricted fund.  Nonprofits contemplating establishing a restricted fund should consider that, if the community’s generosity exceeds the community’s needs, the nonprofit cannot use excess restricted funds donated by the community for wildfire relief for the nonprofit’s general purposes.  Accordingly, nonprofits may want to consider placing limitations on the amount of donations they will take in, how long they would want to administer such a program, and if they are in a position to adequately document the distribution of the small grants.  Indeed, there are many considerations nonprofits should consider when engaging in that kind of direct giving, a few of which are addressed below.

Can a Nonprofit Organized as a Public Charity Provide Disaster Relief Even if it Did not Specify in its Exemption Application that it Was Going to Engage in Disaster Relief?

Yes.  The IRS has advised here that organizations with 501(c)(3) status can engage in other charitable activities that accomplish a charitable purpose, even if those activities were not described in its exemption application.  That is because providing food, clothing, and other essential resources to victims of a disaster is a quintessential example of charitable activity.  Thus, a public charity does not have to obtain permission from the IRS to engage in those activities, but it must report new activities on its annual Form 990 informational tax return.

Can a Nonprofit Make Small Grants or Provide In-Kind Donations to its Clients, Employees, or Others Connected to the Nonprofit?

It depends on a number of factors.  For example, nonprofits may provide financial or in-kind donations if such actions align with their charitable purposes as stated in their Articles of Incorporation and if doing so would not violate the “private benefit” doctrine.  The “private benefit doctrine” governs 501(c)(3) entities.  It requires the activities of a 501(c)(3) entity to serve the broader community, rather than designated private individuals.  When the IRS evaluates whether private benefit concerns exist, it often looks at whether the organization’s activities serve a “charitable class.”

With respect to disaster relief activities in particular, the IRS explains in its publication on providing disaster relief through charitable organizations that charitable donations must benefit a “charitable class.”  A charitable class must be either large enough that the potential beneficiaries cannot be individually identified and/or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, will benefit from a nonprofit’s proposed activity.  Thus, a nonprofit that only has a handful or clients, employees, or others impacted by a natural disaster, and no preexisting activities connected to providing disaster relief to the public, may have a harder time showing that providing grants or in-kind support to them is serving a “charitable class.”  On the other hand, if a nonprofit has a preexisting program to provide the community with emergency assistance, and the organization provided assistance to some community members affected by a fire, as it would any other eligible member of the public, it would be easier to establish that a charitable class was benefiting from that activity.

Additionally, nonprofits should note that, if they want to provide assistance to individuals with substantial influence and control over the nonprofit (such as a Director, Chief Executive Officer, or Department Head), then they should evaluate whether the potential assistance would create issues related to conflicts of interest, self-dealing transactions, private inurement, and excess benefit transactions.

What Process, Documents, and Considerations do Nonprofits Need to Consider Implementing When Providing Direct Disaster Relief?

If a nonprofit provides direct disaster assistance, especially over the long term, it should put in place formal processes for implementing a disaster relief program.  To that end, drawing from the IRS’s publication on providing disaster relief, steps nonprofits should consider putting in place include:

  • A system for determining or confirming need. Generally, the IRS suggests that for an activity to be considered charitable, disbursements to victims of a disaster should be based on need.  In the immediate aftermath of a disaster, the IRS explains that this is less of a consideration when aid is related to addressing urgent needs.  For example, if someone has lost their home to a fire, they will need shelter, food, clothing, etc.  According to the IRS, those kinds of things can be provided without considering financial means.  However, more rigorous and documented financial need assessments should be implemented as more time passes from the disaster’s occurrence.
  • Documentation detailing donations made. Nonprofits need to maintain sufficient documentation detailing the direct aid provided, the purpose of that aid, the criteria for distribution, and amounts.
  • Objective criteria and independent selection processes. Nonprofits should establish objective criteria and independent selection processes for providing assistance.  Establishing such processes helps protect against issues related to conflicts of interest and can also help reduce risks around discrimination claims.

If a Nonprofit Provides Assistance to Employees as Part of a Charitable Class in Need Because of a Disaster, is That Assistance Taxable Income to Employees?

Likely no, if the assistance is provided following the requirements of Internal Revenue Code section 139, which allows employers to provide qualified disaster relief payments to employees on a tax-free basis.  Qualified disaster relief payments include: (1) any amount paid to or for the benefit of an individual to reimburse or pay for reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; and (2) reimbursements or payments for reasonable and necessary expenses incurred for the repayment or rehabilitation of a personal residence or its contents that need to be replaced due to a qualified disaster.  Qualified disaster relief payments do not include payments for expenses otherwise paid for by insurance or other reimbursements or income replacement payments.  A “qualified disaster” includes a federally declared disaster.  President Biden approved a Major Disaster declaration for the California fires on January 8, 2025, which means the wildfires affecting the Los Angeles area meet the criteria to be a “qualified disaster.”  If a nonprofit wishes to provide disaster relief payments to employees, it should seek the advice of counsel to ensure that the payments are for reasonable and necessary expenses and otherwise comply with the requirements of Section 139.

If your nonprofit has questions about these issues, please contact Liebert Cassidy Whitmore’s Los Angeles, San Francisco, Fresno, San Diego, or Sacramento office.

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