In this episode, Toby Mathis, Esq. welcomes Karim Hanafy, Esq., head of Anderson Business Advisors’ Non-Profit Division. Karim and Toby will go over nine benefits of establishing a family foundation, the various tax benefits, and show you how you can get started today.
Karim Hanafy is a nonprofit attorney with over 20 years of experience forming nonprofit organizations, obtaining 501(c)(3) tax-exempt status, advising with ongoing compliance, and assisting with annual tax reporting. Karim previously worked in the Tax Exempt Division at the IRS, and he uses his IRS experience to advise nonprofit organizations on the application process and ongoing compliance.
- Karim’s background, the IRS, and journey to Anderson
- Legacy planning and asset protection
- Non-profits are not just for the wealthy
- The list of benefits
- Annual donation limits – public vs private, cash vs. stock
- Growing assets ‘tax efficiently’
- Family can serve as board members
- Control is maintained by the family
- Payout requirements – private vs public
- Working for a foundation after retirement
- Deferring your salary from a non-profit
- Avoiding estate taxes
- Next steps to starting a non-profit
- Public charity or private foundation?
- File with the IRS – Karim has been getting approved with lightning speed- 100% of Anderson’s filings are approved
- Funding the non-profit
- Contact Anderson Business Advisors or come to our Non-Profit Workshops
Full Episode Transcript:
Toby: Hey, guys. This is Toby Mathis with the Anderson Business Advisors Podcast. Today, I have Karim Hanafy on. Karim, welcome first off.... Read Full Transcript
Karim: Thank you. It’s great to be here.
Toby: I’ll let you do your introduction, but I’ll just give the broad strokes. Karim heads up a very busy philanthropic division at Anderson Business Advisors and oversees all the nonprofits that gets formed. Before he became one of our attorneys, he actually worked as an attorney for the service in the IRS. Why don’t you give us a two-minute summary of your career, what you focus on, and what you do for us?
Karim: All right. Basically, as Toby says, I was working at the IRS. I was there for about five years. When I started off my career coming out of law school, thinking I wanted to work for maybe a big five accounting firm, which was the big five at the time, thinking I’m going to do corporate tax returns, or at least make recommendations regarding corporate structures and corporate entities. But then it turned out there was a position available at the IRS in the tax exempt division, basically, just working with nonprofit organizations, 501(c)(3) organizations, reviewing applications for exemptions in referring to tax returns.
I just applied for that position, was offered the position. I worked there for about five years. Of course, just involved in reviewing hundreds and hundreds of applications of all types of 501(c)(3) organizations. After that, I went into private practice. I’ve been there for about 15 years.
I joined Anderson two years ago in 2021. Since then, I’ve been working with close to about over 500 organizations, for sure, maybe close to a thousand nonprofit organizations. We’ve done applications for exemption for over 500 nonprofit organizations at this point. A heavy workload. A lot of clients that we’re working with and dealing with, but it’s very, very rewarding to say the least.
I worked a lot of different types of organizations all over in terms of the range, the type of activities they’d like to do. It’s been extremely challenging, but very interesting to learn about the types of things that they want to do, the types of missions they want to carry out and accomplish, and just the things that they’ve been doing out there in the public sector trying to help those who are in need of some type of help or assistance.
Toby: We are one practice. There are millions of nonprofit organizations. I think they get underutilized. My personal belief is that if people understood how powerful they are, they would actually gravitate towards it. There’s a reason you cannot find a wealthy family that does not have a foundation. It’s really tough. It’s because it’s one of the few tools out there, where you can actually do social change. You get a lot of personal benefit too and a lot of personal satisfaction.
That’s what I want to dive into today. You gave me a wonderful list. I’m going to call this the nine benefits of establishing a family foundation. I want to be really specific about this because we’re talking about a family foundation, not a public charity under this circumstance. You’re talking about, hey, I’m setting something up that’s going to be a giving organization, or you using them as both?
Karim: It can be both because we work with a lot of nonprofit organizations. A lot of clients who use the term foundation, their whole family is part of the foundation, but they’re actually public charities. They could be a public charity, they could be a private foundation. It doesn’t really make a difference what you’re going to be. What matters is you will be a 501(c)(3).
What we want to advise the clients is, what’s going to be the best thing for you considering what you want to do in terms of your activities? We’re looking at your goals and your objectives, and then we’re going to recommend exactly how it should be structured to make it easy on you.
We’ve heard this time and time again. The only thing they want to do is serve a charitable purpose, just go out there, and do the work. They don’t want to have to deal with any of the administrative or the paperwork that’s going to be involved in it. We want to do it for them, but we want to make it easy on them as well. That’s our goal and our objective with it whenever we’re working with the clients.
Toby: Let’s dive into some of the benefits. Before I do, I want to do the 10,000 foot view that whenever we look at these things, we look at it from an asset protection attack standpoint and the legacy planning. This actually checks all three boxes. I know we’re going to focus primarily on the tax benefits because they’re so massive, but the beautiful part about foundations, guys, is that you technically don’t own them, which means they can’t be taken away from you.
There’s a whole variety of reasons, and Karim is going to get into it. I think we’re going to focus on nine benefits. Karim, I think that’s the magic number for today. They really are quite a phenomenal piece that a lot of folks think it’s the realm of only the wealthy. Do you think that’s true, Karim? Do you think that only rich people use foundations? Do you think that there’s a place for everyday Americans too?
Karim: It’s all shapes and sizes, it’s not just for the wealthy. Once upon a time, especially when I started working out, and even when I was with the IRS, the private foundations seem to be for the wealthy, but the public charities seem to be for a large group. They were primarily wealthy people as well. But I’ve noticed over the years, especially over the last 15 years seeing a thousand organizations, that’s not the case at all.
Certainly, the ones that are at the top and the ones that you hear about the most are the wealthiest ones. We’re over a million and a half nonprofit organizations. It’s not just the Bill and Melinda Gates Foundation. There are over a million other organizations. Many of them in terms of the size and the funding that they receive, it’s all over the place.
The founders and the donors who are part of it are not wealthy individuals, it’s just those who have a passion for what they want to do. They’ve had a dream of doing this and wanted to carry something out, so they’ve decided this is what they want to do, by setting up a nonprofit and carrying out those charitable missions.
Toby: Let’s talk about the benefits. Do you have a list there?
Toby: Let’s knock out, what are the big benefits? Let’s go over number one.
Karim: Obviously, the biggest and the best, the most important for many, is that it does reduce your taxable income. Obviously, if you have adjusted gross income, you’re going to probably have to end up paying some taxes to the government. By making a contribution to a 501(c)(3) organization, then your contributions are tax deductible.
Many of us are going to have to pay taxes. You have that adjusted gross income, and it translates to what your taxable income is going to be. For many of us, you will have to pay taxes. Rather than give it to the government who knows what’s going to happen with that money, why not give it to a charity? Give that money to a nonprofit organization. One that you have formed, one that you’ve set up, it can reduce your taxable income, and then you can have some control over what’s going to happen with the money that goes into that charitable organization.
Toby: What are the limits of how much I can donate on an annual basis to my own charity?
Karim: If you give to a public charity, any cash that you make a donation to, you’re limited to 60% of your adjusted gross income if it’s a public charity, and it’s for cash. If you make a donation to a private foundation, a cash contribution, you’re limited to 30% of your adjusted gross income. If you give non cash contributions, for example, stocks, it could be real estate, it could be crypto, you’re limited to 30% of your adjusted gross income when you’re donating to a public charity, and it’s 20% if you’re donating to a private foundation.
Toby: Let’s say they have ABC incorporated stock, maybe they invested stock interest from an employer, they’ve been holding it for 15, 20 years, and now it’s worth a lot more. Let’s say that you got it for $100, and now it’s worth $1000. You don’t have to sell that and then donate the proceeds. You could get a $1000 deduction just by donating that share, right?
Karim: Yeah, absolutely. If you were to sell the stock first, you would have to pay taxes, and then you would make the contribution so it reduces the amount that’s going to go to the nonprofit organization. The flip side is, you can just give it directly to the nonprofit organization.
You can deduct the fair market value, so you get the benefit of it. You don’t have to pay taxes on that capital gains or the appreciation of the stock. You can deduct it, the full amount, and the nonprofit gets 100% of that instead of getting an amount after you’ve paid your taxes on it. They get the full benefit, you also get the full benefit. It works both ways.
Toby: I think you might have just hit benefit number two there. What is number two?
Karim: It avoids high capital gains so you can donate appreciated stock to a nonprofit, or an appreciated asset to the nonprofit. You avoid having to pay capital gains taxes on that. Instead of having to pay taxes, you would get a deduction for the fair market value of what you’ve contributed to the nonprofit organization.
Toby: Let’s just use our example. Let’s just say you had a piece of real estate. You’ve had the home for 30 years, you’ve fully depreciated it, you bought it for $100, it’s worth $500,000 now, and you’re like, oh, Jiminy Christmas, maybe I’ll give it away, maybe I’ll sell it to somebody. If you give it to charity first, let’s say it will be worth a $500,000 deduction, but you might not be able to use that all. You can carry some of that forward for how many years?
Karim: You can carry it for five years. You don’t lose it, it’s just differ.
Toby: Let’s say we gave away a $500,000 property. You’d get a $500,000 deduction, and it would be limited to 30% of your adjusted gross income. If it was to a public charity, it would be 20% of your adjusted gross income if it’s to a private foundation. We’ll get into what the differences are in a little bit. The most important thing is you have no recapture. You don’t have to pay any capital gains. You’re just getting a flat out deduction. All right, what’s the third benefit?
Karim: Let’s assume under this scenario, you have $100,000 in stocks when you bought it. You paid $100,000. Or let’s say you paid $50,000, and now it’s worth $100,000. You’re going to donate $100,000 in stock, you’re going to avoid paying taxes on it when you do that, you donate it to the nonprofit, now the nonprofit gets $100,000. Imagine it grows to $200,000, now it’s doubled in value. You never pay taxes when it was donated, and you don’t pay taxes when it goes up from $100,000 to $200,000. You get this benefit as well.
It grows tax efficiently. It grows to 200,000, and you decide to sell the stock. You don’t pay taxes on any capital gains, whether it’s stocks, whether it’s real estate, whether it’s crypto. You don’t have to pay any taxes on that when you sell those assets.
The beauty of it is, let’s assume that it’s $200,000. Let’s say, $20,000, for example, you may have to pay taxes. Instead of doing that and giving it to the government, now you can take that money and use it for whatever charitable reasons that you want, whether it’s going to be to pay someone, to come and work for the organization, or whether it’s to distribute it and make distributions, or spend money to help, to serve a charitable purpose. There are many benefits of getting this and growing it tax free when you sell it tax free, and then you can use it for charitable benefit as well.
Toby: Fantastic. We’ll get into some of those. I’m sure there are lots of questions being posed right now. Let’s go to number four. What’s the fourth benefit?
Karim: The fourth is you can invest in stocks, crypto, real estate. Again, the profits are tax free, so it goes into what was mentioned before about growing the assets tax efficiently. Again, imagine that it has doubled, tripled, or quadrupled in value.
Let’s say you receive the assets and stocks, it’s worth $200,000, you sell it, you don’t pay taxes, and now you’ve decided that you want to use it for affordable housing. You want to use it for housing, for real estate investing, you can take the $200,000, put it into that, you can generate rental income, it’s tax free. If you end up selling it at a profit, it’s also tax free.
All this money is going to be recycled, basically. It’s going to be used within the nonprofit. The return on your investment is going to be much higher, it’s much more efficient again. You get a better return on your investment by being able to do that and not having to pay any taxes on that. You have many options as to how you can invest that money.
Toby: Easy math, there’s the rule of 72, which means if you have an interest rate, it’s going to double. Divide that interest rate into 72, and that’s the period of time it will take to double. The S&P annual growth is just over 10% since its inception in the 1920s, I think it’s what it was. That means it’s doubling every seven years.
You put 100,000 in. Fourteen years from now, that’s 400,000. It doubled in year 7 to $200,000. That $200,000 doubled to $400,000. In 21 years, that $400,000 is $800,000. But you haven’t paid any tax. You’re not having to pay tax. You could be selling and buying throughout that entire time. It does not matter anymore because you do not have a taxable event inside of an exempt organization.
That’s why these endowments like at Harvard and Princeton, all these things get so huge because they’re not taxed. The growth is absolutely compounding with no tax on it. It’s just massive, and you unlock that benefit. I think that was four. What’s number five? What’s the fifth benefit?
Karim: The fifth is your family can serve as board members. Many of our clients keep talking about this, where they want to start this nonprofit. It’s been their dream, maybe they’ve been working so hard. Many people have this dream of what they want to do when they retire or when they’re financially secure. Many of them talk about that nonprofit they want to set up. Not only for themselves, but they want to create that family legacy.
Again, we all look to the Bill and Melinda Gates, and we see what’s been done and the impact it’s had in society, both globally and internationally. Many people have that dream of wanting to do that, even if it’s at a local level, but they want their family to be a part of that. They want to get their families to be involved with it so that it’ll have a lasting impact.
Again, everyone dreams of starting their own nonprofit or working for a nonprofit. This is their chance to do that because they want to be able to give back, and they want their family to be a part of it because anything that you see the people that you help and that you benefit, it certainly has an impact. It’s something that you’re going to remember, especially for your family or for your kids. They want their family to be a big part of it, so creating that family legacy is a big thing.
Toby: That’s taxable, though. If they’re getting a salary, they’re going to get paid money that’s taxable to them, but the exempted organization can pay. Again, I always look at this and think of as exempt just like an IRA or a 401(k). But when the money comes out, there could be a tax implication if you pay it out here, you pay it out by having somebody work for the organization, and then they would get a salary, right?
Karim: Yeah. That’s the thing. If you’re going to get paid for it, then you will have to pay taxes on it because you’re just basically like an employee, whether it’s a W-2 or a 1099, as an independent contractor, you’re going to have to pay taxes.
Many of them started off really small at very basic level, where their kids are going to be working and serving as a volunteer, possibly. But again, you can’t pay yourself if you want, either way. What they just want more than anything is for their kids to be a part of it or their family to be a part of this charity or this foundation.
Toby: Yup. They get it. All right, what’s number six? The sixth benefit?
Karim: Six is that the family can maintain control of the foundation’s purpose, grant making, or its future. Many people think that you can only do this within a private foundation, and that’s not the case. You can also do this within a public charity. Perhaps you want to be permanent directors. You can always have some clause or some provision in there that allows you or your family members to be permanent directors of the nonprofit. It gives you a veto power, and it prevents others from trying to remove you without you having a say in that.
Of course, our caution always is, and this is usually a problem, but we tell the clients, make sure that your number one purpose is that you’re carrying out the fiduciary duties on behalf of the nonprofit. You’re not being a permanent director, and you’re exercising your veto power just because you want to have the control. But you do have a vision that you want, and you’re doing it on behalf of the nonprofit as well as a fiduciary of it as well. That’s typically how it is.
They do want to be a part of it because it is their baby. This is something that they started with. They funded it, they helped it to become successful. The last thing they want is for some other board members who are unrelated outside parties to come in and remove them from it after they’ve worked so hard to make it successful.
Toby: This is a good time to talk about what a nonprofit could be set up for because you could be scientific, educational, social benefits, animal welfare, amateur sports. There’s a lot of things that are covered by charitable activities, low income housing, moderate income housing, residential assisted living, recovery housing, just in the real estate world on the education side, just about everything. We have almost every university in the United States as an exempt organization. Just about every hospital is probably an exempt organization.
The NFL was a charitable organization for a long time. Green Bay Packers still are. There’s Major League Baseball, National Hockey League. These are charitable organizations. You have those types of flavors that are actually doing something. Then you have the other flavor, which is the family foundation, where you’re not doing anything other than giving to those organizations, right?
Karim: Yeah. Most private foundations if you’re a private foundation are typically grantmaking. You’re going to make distributions to other 501(c)(3) organizations. You are required as a private foundation to do that. You have to make distributions to other 501(c)(3) organizations. There are some like a private operating foundation. Oregon public charities may decide they want to carry out their own activities instead.
You imagine something like, animal shelter or anything that’s going to be educational. We see museums as an example. They are carrying out their activities themselves rather than doing grantmaking, so they’re carrying out these activities. That’s another option.
You mentioned about affordable housing and shared housing, for example. These are organizations that are carrying out their own activities, rather than doing grantmaking, which is giving out to other organizations that are providing the affordable housing. You can either do it directly or indirectly.
Toby: Do I have to give money to other charities every year if I am an operating public charity?
Karim: No, you don’t. Private foundations, there’s a payout requirement, basically, 5%, that has to go out of your total assets that you have of your investment assets. When you imagine that you’re a foundation like the Bill and Melinda Gates, and you’re talking about anywhere from $10 billion, you’re talking about $500 million that you have to make in terms of distributions and payments. That’s a lot of money that you have to do.
It’s 5% of your investment assets, but a nonprofit public charity, you’re not subject to that same requirements. If you have $10 billion in assets, you don’t have to do that. Our recommendation has always been, do some sort of spending, do some sort of payout. You can do it again, giving to other organizations, or you can do it directly through your activities that you’re spending.
As I mentioned, again, let’s say it’s the museum. Anything that you spent with that, if you have an animal shelter, for example, something like that, the money that you’re spending to operate it, to hire staff for that, all of that would be the same thing as spending 5% making it payout to other organizations. You can do it that way, but there is no requirement that you give 5%.
The IRS will look and see. If you have a lot of assets in there and you’re not spending any of it, that could be an issue. The recommendation is to spend something. You just don’t have to do 5% like private foundations do. You have a lot more leverage leeway, a lot more discretion, of what you can do within a public charity than you can within a private foundation.
Toby: The rule of thumb is public charities do stuff for the benefit of society. Private foundations don’t do anything, except give money to the organizations that do stuff for the benefit of society. They have that 5% that they have to give on an annual basis. If in doubt, contact us and we’ll explain it. Then there’s a hybrid, the private operating foundation that sits there in between that still does stuff.
Again, there’s ways around those rules. Make sure you’re talking to a professional like Karim, which we’ll post his information here to make it really easy. All right, we’re on to number seven, I believe.
Karim: Number seven is you can work for the foundation once you retire. Again, as I mentioned before, many people who are working have the 40-hour work weeks, 60-hour work weeks, or even 70 or 80, many of them just are dreaming of what they can do once they can relax. For many of them, besides traveling, what they want to do is they want to set up their own charity. They want to set up their own nonprofit, and they want to go out there and make a difference.
Whether it’s through their own personal experience, where they’ve worked or where they grew up, there’s always something that’s had an impact on them, and now they want to give back. It’s interesting. Some of the clients that we meet, even one of them just recently that I spoke to just last week, he wants to give scholarships to those who are in nursing school because he was a nurse. He understood the challenges that they had to face of having to work full time jobs to be able to pay for their student loans and to pay for their tuition.
He had said that one day, whenever he makes it, what he wants to do is he wants to provide a scholarship for everyone in that same university, where he attended and where he graduated, so that they don’t have to carry that burden of having to work full time while also working at the hospital, having a full time course load as well, and a family to take care of. It was just too much for them to handle.
He saw that, he saw a problem, he found the solution, and what he wants to do if he wants to fix that. Many people have that dream, whether it’s their own personal experience or where they grew up as well. What they want to do is they want to do this and focus on this full time.
Toby: If I’m hearing you right, that means that during their peak earning years, they might be giving away assets or cash to their charity. The charity might be there to do these grants to scholarships to help individuals, but that doesn’t mean that you can’t take a salary out of it when you retire and give yourself an income.
Karim: No, absolutely. You can work there. That’s what many of them want to do as well. They want to work for the nonprofits at some point once they retire because they’ve all said the same thing too. I’m still going to need to receive an income at some point, even when I’m at retirement age. Even though I’m going to be collecting some sort of benefits to my retirement plans, I’m still going to need to pay myself. You can certainly do that.
It brings up to point number eight, which is you can pay yourself, your family, and perhaps do it through a deferred compensation plan. Rather than paying taxes on this stuff now, you can defer it through a deferred compensation plan. Once you are reaching retirement age, maybe at that point, you can pay yourself through the foundation or the charity.
Toby: You’re getting paid for work you’re doing now, but you’re deferring it to later .There are some rules to follow, I think it’s 408 or one of those sections that says, hey, you actually have to kick more money in. You actually have to give somebody a reason to defer it. There has to be some risk of loss and some things like that, but I’m sure that’s what you guys handle. That just means that I can work now, and I can get paid later.
If I say, hey, I’m in a high enough tax bracket, I don’t need the money, what I really want is to know that I have an ironclad future, and I can get paid for the stuff I’m doing now at some point when I retire. Is that accurate?
Karim: Yeah, that’s correct. Again, to your point, you may be in a higher tax bracket now, so you want to defer that salary, which when you take that salary out, chances are, you’re going to be in a lower tax bracket at that point. You will be paying less taxes if you wait until later to take the money out when you need it and not now when you may not need it at this point.
Of course, as we all realize in life, one thing you learn is that you wish you had more money at retirement. This is certainly a way that you can do that, deferring that compensation, because you don’t necessarily need it now. It will come in handy because we’re all living longer as well, so this would be a good time to be able to take the salary out.
Toby: It’s like a 401(k) or IRA then. You’re getting the deduction now. It’s invested, it’s growing. In theory, you’re growing that money by investing inside the exempt organization, and then you just take it out later.
Karim: Yeah, exactly.
Toby: Same rules, exempt organizations. All right, what’s number nine? What’s the big number nine, our last big benefit to creating your own family foundation?
Karim: The last one is, for those who are wealthy, and you will be subject to estate and gift taxes, it can eliminate those potential estate taxes. As you mentioned before, you highlighted this before, once you put it in the nonprofit, it’s owned by the nonprofit. Now it’s in a separate asset. It’s in a separate entity. It’s not owned by you, it’s not owned by your estate. It goes into the separate nonprofit.
Even though you can be a big part of it, you can be a founder for this. You can have control, you can be a permanent director, your whole family is part of it, you can take a salary out of this, you can control the direction of what you want to do with the organization, including the grant making activities that you’re going to do, the funding, whatever you’re going to do. You can do all of these things, and yet it’s not in your estate. It’s going to be in a separate entity that falls outside of your estate.
Toby: If you think the estate taxes are not making 40%, right now we have the exclusion that’s up to $13 million or $12-something million per spouse, but a lot of people are going in excess of that. When I first started, it was $600,000 exclusion, and there was no portability between spouses. Your total amount that you could exclude was $600,000 for a married couple. It was really frustrating. They would lose the house, they’d lose assets. This way, you could avoid that completely.
Karim: Yeah. Keep in mind as well, it is high now. It’s set to expire at the end of 2025. I’m not making a political statement. But typically, if you have Democrats in Congress, and they’re controlling Congress, chances are, they may not be pushing for this to be extended. Whereas if you have Republicans in Congress, they typically do want to extend this. It’s all going to depend on the political parties that are involved too. My feeling is it’s probably going to go back. It could be $5 million, for example, in 2026, and I don’t see it going back up again for a little bit.
Toby: This is a good way to get it out. People use irrevocable trusts, they do some gifting during their life, and things like that. But here’s a way where you could actually not use up your gift exclusion, but you can donate it and get a tax deduction while you’re donating and still get it out of your state.
Karim: Again, play a large part of what you can do with this foundation as well. You have a lot of control and discretion as to what you can do, too.
Toby: There’s a ton of benefits. We just listed nine. You could probably do even more as you start diving into the nuances. Let’s talk about the stuff that’s probably on people’s minds, which is, hey, I’m thinking about this, what are my next steps?
Karim: Your next steps are pretty simple, to be honest. Come up with a purpose or a mission. What is it that you want to do? Toby, as you’d mentioned before, our clients do all types of work, from the affordable housing, to the shared housing, to educational organizations. They want to help children. They want to break the cycle of poverty to help them give them opportunities.
They want to teach them, for example, stuff like STEM, science, technology, engineering, and math, because they believe that’s where the future is going to be. If you teach them this at an early level, then they could succeed both in high school, get scholarships to go to colleges, and then they’re going to have jobs they can choose from so it can break that cycle of poverty. Stuff like educational organizations as well is a popular thing.
There’s the humanitarian relief, where you provide food, clothing, shelter, even cover medical expenses as well to help cover these expenses that low income families can’t afford at this point. This is also a very popular one that we have.
We mentioned about the scholarships before. There are all types of scholarships that are given to individuals. It’s not just for nursing school, but for those coming out of high school. It could be those that are applying overseas as well, internationally. These are many options, too.
We have many who are international clients, and they want to give back to their communities or villages. A common one that we’ve seen a lot is building water wells in villages in Africa, which is quite fascinating just learning about this because of the fact that you can put one in a village, it can help hundreds and hundreds of people.
Kids stay in school, rather than having to walk 6, 7, or 10 miles to go pick up water. They can’t go to school because they have to go there to stand in line to come back with water. It helps with sanitation, it helps with cleanliness. People don’t die because of the dirty water as well, so it’s amazing impact and the things that we learned from the clients of what they can do.
There are all types of things that you can do to help because no doubt, there’s a tremendous need. We always see this all the time. We have so many problems in our society that need to be fixed. We always blame the government because they don’t do anything about it. It’s severely underfunded in so many areas, but this is where nonprofits can come in and try to help fix these problems too.
Toby: Yup. You can do it, absolutely. Articulate a purpose. Once you do that, then what’s the next step?
Karim: You would want to just set up the entity, and it’s pretty simple to do. You’re just going to set it up at the state level. You’re just going to establish a nonprofit corporation. It doesn’t matter if you want to be a public charity or private foundation. You would just set it up as a nonprofit corporation at the state level.
Toby: That’s something you could do for them if they reach out.
Karim: Yeah, for sure. Easy to do.
Toby: What’s number three? What’s the third step there?
Karim: Create a board of directors. Select your directors, and select who the officers are going to be from those directors.
Toby: You can have a board of directors, or can you do it yourself?
Karim: You need to have at least one director. It depends on the state where you’re going to incorporate. Nevada only requires one director, but some other states required.
Toby: I could set it up. If I was just setting something up, and I wanted to do it, I want to have a receptacle for a donation, I could set it up and be my own director, or do I need to have a bunch of third parties?
Karim: You could be your own director? Yeah, absolutely, you can. The donors are also become the directors of this nonprofit organization, and that’s very standard. Almost every one of them do that.
Toby: All right. I have articulated a mission, I’m setting up the entity, I’m naming a board, then what do I have to do?
Karim: You would need to get an EIN, your tax ID number, prepare a set of bylaws, internal operations of how you’re going to be operating, the roles of the directors and the officers, and then we would apply for exemption with the IRS to become a 501(c)(3).
As you do that, once you apply for exemption with the IRS, do you have to determine what your classification is going to be? Do you want to be a public charity, or do you want to be a private foundation, which was something that we discussed briefly at the very beginning? You would have to select what you want to be.
At the state level, you’re just a nonprofit. They don’t care whether you’re a public charity or private foundation. You’re only a nonprofit is all it is. Contributions are not tax deductible, you get no benefits from that.
Toby: As we pull people aside, their special language you have to have in your organization, you do not set this up through one of those legal services online or stuff. It’s not going to happen .You actually have to put special language in the articles of organization.
It’s almost always going to be a corporation. You want to make sure that you’re dealing with somebody who’s done this. Even more importantly, when you’re doing the exemption, you’re putting in projected financials and you’re doing all that, correct?
Karim: Yeah. We’re very thorough with the description of the activities of what the nonprofit does because that’s an important part of it. When I worked at the IRS, I had to review the activities, and then I had to prepare a memo to file. That memo file, to me, was probably the biggest hurdle because I have to articulate why this organization qualifies. They didn’t do it, and they don’t do a good job of it. I saw that, and that was what was causing the delays with getting the exemptions.
From my end, not only am I explaining the activities thoroughly, but I’m explaining why it qualifies. I’m not just saying it qualifies because it qualifies, I’m citing revenue rulings, which is the IRS’s position for similar nonprofit organizations that applied. Their position is if you do these types of activities, you’re going to qualify for exemption. We cite these revenue rulings as part of our reasoning as to why it qualifies. We’re pretty thorough and detailed. We use almost every character that’s allowed within the application to be able to explain it.
Toby: I could say that I’ve been doing this for 25 years and have been around thousands of filings. Karim and his team right now are getting, by far, the best results of anybody I’ve ever seen applying for exemptions. I can say this straight faced, it’s ridiculous how fast you guys are getting approvals because the average is about six to nine months to get an exemption approved from the IRS. You’re getting exemptions. What’s your quickest exemption back?
Karim: They’re currently reviewing applications from September right now, the beginning of September. You’re talking about almost seven months right now. This is on the IRS website.
We’ve been getting applications approved within three days. Not just one or two, we’ve had over a dozen that have been approved within three to four days. Over a dozen within the past two months. We are seeing the results have been phenomenal. It’s mind boggling. I’m shocked at seeing the results too, but it’s not just once. It’s been happening many times. We’re seeing three in four and five days.
Toby: Right. They know your application and they know you. They’re saying, they’re doing our job for us, this is really easy, and they’re getting the easy work off. They’re going back to the people that are trying to do their own and that’s bogging down the system. For sure. That’s the only explanation that makes any sense. I can’t imagine it because it’s not happening for others, I can tell you that.
What’s the next step? You set up, you get your exemption, you can actually start before you get that exemption back, you could start your business as soon as you file it.
Karim: Yeah. Our recommendation is from step one. Once you’ve articulated your purpose, your mission, you know exactly what you want to do, you can start taking steps at that point to begin. Getting everything ready and lined up, rather than waiting until you get the 501(c)(3). You can start that from the beginning.
The funding part, you can make a donation at any point that you want to. But if the applications are going to get approved as quickly as they have been for us, then you can always wait until you get the 501(c)(3) and then fund it at that point if you want it to. Many people like to defund it before, usually because it’s the end of the year, and they want to make a charitable contribution and get the deduction for that.
Toby: Just be clear with people, if you set up a foundation, the exemption relates back to the date that it’s filed with the state. If I set up an organization on December 1st, I file for exemption even in January or February the following year, and it gets granted the following December, it relates back to the first filing. I’m being straight with you guys too, it’s sometimes better to play it safe.
Have you get rejected? Have you had any exemptions, where you’ve applied and you are not successful with the IRS, or are you betting a thousand?
Karim: No, it’s been 100% at this point.
Toby: If you pass it through somebody like Karim and his team, and I’m not saying you have to use them, but anybody who does this for a living could tell you whether you’re going to get approved or not, and then it’s just, hey, they’re getting it done> We’ve done thousands, we’ve never had one get rejected. Is there any other steps that they need to take? Once they get it, they put some money in it or they put some assets in it, then what do they do, just operate?
Karim: Yeah, but we still have the issue in determining whether you want to be a public charity versus a private foundation. The other thing would be just to consider grant making what your activities are that you want to do. Who are you going to target? Where do you want to operate? Do you want to look about making connections?
You’re only talking, at this point, about what your next steps are in terms of, operationally, what are you going to do. You have all of these that you have to focus on at this point. Those are the problems that you look for.
Toby: That sounds like a great video, I’ve set up a charity, now what? We’ll do that next time. For this one, we just hit nine benefits to establishing a family foundation, how you can use it, and you learn the next steps that you would take if that’s resonating with you.
Karim, are there any other final comments you want to give? We went a little bit over, but I didn’t want to stop. I thought this was really good information and that people would enjoy it. Is there anything else you want to tell people?
Karim: I want to just say this as a shameless plug. There may be many questions and issues that you have that may delay you in being able to do this and apply for exemption or to set it up, but none of this is new to us. We’ve done this hundreds and hundreds of times. It may be new to you, but it’s not new to us.
I would say, because we have the experience, we have the results, we have this nonprofit Q&A session that we also hold for only the nonprofit clients within Anderson, we do it exclusively for them, if you’re looking for someone that you need to set up your nonprofit, then please come to us because we do have the experience. We have the results to prove that as well, that we can do it for you and get it done quickly and efficiently.
As one example, we actually got one from the time that it was set up at the state level to the time they got the exemption. It was 15 days total is all it took to get it. We have that experience. We know what we’re doing. We’ve done this hundreds and hundreds of times.
Toby: I really appreciate you coming on and sharing this information. Nine benefits to establishing a family foundation. We’ll have you on again to talk about operating them. I really appreciate you.
I’ll put your information in the show notes so that if somebody wants to talk to you or nonprofit group that they certainly can. I just want to say from the bottom of my heart, thank you for coming in. Hopefully you’ve given some people some great ideas and have some hope in implementing some things that will create some social change.
Karim: Thank you. Thank you for having me.