Today Toby Mathis, Esq. speaks with Karim Hanafy, Esq., Anderson’s non-profit expert, about the top ten types of non-profits you can form to access tax benefits for your charitable activities. These range from familiar causes like humanitarian aid (both domestic and international) to education (including scholarships) and even combating social issues through activities and therapy animals. Research, veteran/elderly assistance, and various housing needs rank high, as well as animal welfare, environmental causes, and empowering communities. Finally, the importance of supporting other nonprofits, regardless of their specific cause, is also an option.
Highlights/Topics:
- Karim’s background/expertise in non-profits
- Top ten types of nonprofits
- Humanitarian relief – domestic/international – food, clothing, shelter, medical care, housing
- Education and scholarships- trade schools etc.
- Activities to combat obesity, depression, and isolation – social and outdoor activities, therapeutic animals
- Research – medical and financial support
- Assistance for veterans and the elderly- medical, counseling, jobs, housing
- Housing – this used to be number one – recovery from abuse, elderly, vets, under-resourced
- Animals – sanctuaries, animal therapy programs
- Miscellaneous – pollution, ministries, waste reduction, empowering the underserved, disaster relief
- International giving – orphanages, food, clothing, shelter, animal sanctuaries, clean water
- Supporting any of the above activities, or supporting other organizations that provide the previous support
Resources:
Email Our Team To Get Your Nonprofit Started
Schedule Your Free Strategy Session
Tax and Asset Protection Events
Full Episode Transcript:
Toby: Hey guys, Toby Mathis here with the Anderson Business Advisors Podcast, and also on our YouTube channel. I have Karim Hanafy, attorney and head of Anderson’s exempt entity group. We’re going to be talking about all the things you can do as a nonprofit.
I know we’re going to be going over 10 popular types of nonprofits, but this really focuses on what type of activities can be exempt. There are really two broad categories. There’s exempt—it doesn’t pay tax—and then there is exempt and other people can give you money and write it off as a charitable donation. Those are two very different things, and Karim’s going to go over it today. Welcome, Karim.
Karim: Thank you very much. It’s great to be here.
Toby: All right, dive in, my friend. Let’s talk about these types of nonprofits and how they work.
Karim: Just a brief intro about myself. I am Karim Hanafy, nonprofit attorney here with Anderson Business Advisors. I have been working in this area for about over 20 years, so 15 years before I joined Anderson. I’ve been with Anderson now for almost three years.
I like to say that in the three years that I’ve been working here, I’ve gained another 15 years of experience, and it’s because of the volume of clients that we work with. We deal with (easily) at least one new client each day, and we give them a lot of advice and recommendations. But they also teach us some things too, and we’re learning a lot from these clients. We’re taking what we’ve learned from other clients, and helping it and applying it to new and existing clients or future clients as well, about recommendations we can give them.
We give them suggestions to expand on what it is that they’re thinking of doing. In addition, there are many clients that are also interested in forming a nonprofit, but they’re not sure what they want to do, so we’ve come up with 10 popular types of nonprofits. These are the kinds that we see all the time within Anderson, the types of entities that we set up, and we’re going to go through the 10 common types.
The first one is dealing with humanitarian relief, we call it that. It’s just assisting in and you’re supporting low income families, refugees, women and children, shelters, all of these things. It could be soup kitchens, it could even be toys for children, sports equipment.
Even balls, for example. Basketball, soccerball, football, anything like that. And it deals with food, clothing, shelter, expenses, medical care, housing assistance, even education. All of these are the types of things that you can do within humanitarian relief.
It could be non-cash or cash, and the cost to operate this is very low. It doesn’t require any money at all because you can contribute used items if you want to do that, and you can do it domestically or internationally.
The beauty of this is donating these items. If you do it to individuals, it’s not going to be tax-deductible, but if you donate it to a 501(c)(3) and you donate it to them so that they can support low income individuals or refugees, or women and children, and whether it’s a cash or non-cash contribution, it’s tax-deductible doing it through a 501(c)(3) instead of doing it directly to support these individuals.
There are many benefits with setting up a nonprofit like this. It’s easy to set up and operate. You get the tax deductions, and of course you can make an impact. This has become the most common, most popular one within Anderson.
Toby: And this is a 501(c)(3) that qualifies for the charitable donation. You mentioned soccer balls. You’re providing soccer balls to locals. I could give some real ones. We have folks that do helmets for kids that ride bicycles and things like that. One very good friend who’s a traumatic injury attorney, gives away hundreds of these a year. If I give money to that, I get a charitable donation and it’s exempt. If it raises money, if it raises the donations plus it makes money, let’s say it was selling helmets at a discount, it would not have to pay tax on any of that profit.
Karim: That’s right. You get a double benefit with this. Not only you as a donor get the tax deduction for making these contributions, but when the nonprofit receives it, it doesn’t pay any taxes on these items received.
Toby: Perfect. Let’s say that I had a whole bunch of stuff around my garage or whatever. I was like, hey, I’m going to donate a bunch of helmets and a bike or two. I could probably write off the fair market value of those items as well, much like if you were giving it to Goodwill.
Karim: Yes, you can. You can do that.
Toby: Even if it’s my organization?
Karim: Absolutely, you can. As long as the items that you’re donating to your organization are going to be used to support and to carry out a charitable purpose of your nonprofit and to support this charitable class that you intend to support.
Toby: So everybody could go out and do this, go raid your friends, tell them, hey, empty your garage over here. We’ll give it away, sell it, whatever. Get it to the right people. We could do that.
All right. What’s number two?
Karim: Number two is education. The previous slide we’re talking about—assisting low income families—is obviously a great thing and an impact you can make, but it’s usually a temporary solution. Education is one of those things where you can break the cycle of poverty, dealing with scholarships to help children, and low income. It could be children, it could be individuals, providing scholarships to universities at community college, trade schools, IT certification.
As I mentioned before, we learn a lot from our clients. And one of our clients, as he told me, the IT certification, the cost to be able to do this online can cost anywhere from $1500 to $2500 to do. Once you can get the certification, your income can double from $25 an hour to $45–$50 an hour.
We see that there’s a need for it for women, especially. They’re underrepresented in the IT field, so there’s a huge demand for it. This client is offering to cover the expenses for women or individuals who want to get the certification to take the courses to become certified and become an expert in a specific field. IT certification is very common.
We have clients who have set up schools to do the HVAC (heating, ventilation, air conditioning, refrigeration), and there’s a huge demand for this as well. Whether it’s residential, whether it’s commercial, dealing with diagnostic service, maintenance and repair, even sales, there’s a high demand and there are jobs all over the country.
And then welding. I know, Toby, you’ve talked with someone who does welding. He has a school for this because there’s a huge demand for this. He enrolls thousands of students on an annual basis for the welding because again, there is a tremendous demand for it. You can build and create objects of metal, work with skyscrapers, rockets, pipelines. Welders can work at construction sites, railroads, airplanes, aerospace factories, pipelines, electrical plants. Again, there’s huge demand for this. There are scholarships and educational opportunities in this area.
Toby: Let me ask you a quick question. Is this one also where I could get a charitable donation for giving to this organization?
Karim: Yes, you can. Now, as a student it’s like a university, you’re getting something of value in return. But if you are someone who wants to help an individual to obtain certification or skill in this, and you’re donating to support the organization, yes, it’s tax-deductible. Or let’s say you want to help encourage a student, someone to enroll in there, you can donate to the school as well. And again, it would be tax-deductible too.
Toby: Now let’s say that somebody says, hey, I’m going to set this up and I’m going to create a scholarship program for my kids. You can’t do that, can you?
Karim: No, you can’t because if you do it for your kids, it’s considered to be preselected, and the IRS doesn’t allow that. Of course, there is the issue of a private benefit going to family members. So it’s not something that we would recommend.
Toby: So for all of you thinking, oh, I’m going to send all my grandkids to college…
Karim: You can’t do it.
Toby: You can set it up and help everybody else, but for your family. There are other ways. You can have your kids work, your grandkids work for your organization and give away money, pay them a salary, and they probably won’t pay much tax on it if they’re in a lower tax bracket, but that’s a topic for another day.
Number three.
Karim: Number three is activities to combat obesity, depression, dependency. It’s affecting younger generations addicted to electronic devices. We’re also seeing it with those (of course) with obesity. We see it with veterans, recovering addicts as well, even elderly folks. All of these becoming issues.
There are organizations that are conducting either social activities, outdoor activities, something to get their minds off of this, from isolation issues and depression. Anything from sports, dealing with running, biking, rock climbing. These are all the different types of nonprofits that we have set up.
Tennis, soccer, and rugby. We’ve seen a lot for camping. Outdoor activities. Social activities are very common. Chess keeps your mind on something else and focused on something else. And it could become an addiction as well of playing these sports or doing these sorts of activities.
High school mentoring is common. Ax throwing. We’ve seen that for those with depression, that was popular. That got approved within a week. And ballroom dancing as well was the same.
Toby: You had ax throwing for depression and you had it approved within a week?
Karim: Yes, within a week it got approved.
Toby: We need more ax throwing. We need more if we want to combat depression, teach everybody to throw some ax.
Karim: What it was is it was a community, people coming together, getting together, and doing a certain type of activity. This was one of the activities that they enjoyed doing. Never knew that it was such a thing, but it is.
Ballroom dancing also got approved within a week. The outdoor activities do tend to get approved very quickly. Animals tend to get approved very quickly as well. They’re very therapeutic as well, like horseback riding, for example. One with dolphins was therapeutic as well. It got approved quickly.
Toby: And this is still you getting a write-off. If I donate to this and I’m still operating it, I could actually write it off as a charitable deduction?
Karim: Yes. And it doesn’t have to be the equipment. You may donate cash and say purchase the equipment, purchase these items for […]. You can do it as part of the activities as well.
Toby: I do one of these. I have a sanctioning body out here in Vegas, and I always chuck it with sanctioning means that we sanction amateur Muay Thai fights. It’s always fun. You go out there and try to raise some money, but you also have the events and it goes to a good cause. But lots of fun.
All right, number four. I’m going to keep moving you along because we’re two lawyers. We could probably talk all day.
Karim: There’s medical, financial support, and research, and it’s for those who have certain types of issues, usually medical issues. Again, learning from clients.
We had clients who were victims of traumatic brain injury (TBI). Some can recover immediately from these injuries while others have problems living independently, even working, driving, concentrating, remembering new information. It can put a financial strain on a family where the TBI victim cannot work or acts erratically and requires some medical care. These are the issues that come up. They help with activities to obtain marketable skills, even financial support.
The same thing with those with dementia, disabilities, special needs. All of these require medical care and medical treatment. There are signs of depression, so try to help them with marketable skills, finding job opportunities, and improve self-confidence as well.
These are the things that a lot of nonprofits will do, and they know it from experience because they have either family members or they know friends who have been experiencing this. So they know how to help them, to guide them, to give them reassurance, to give them some confidence and self-confidence.
In addition, we see for elderly individuals, the medical care. It continues to escalate in terms of medical costs. We see that for sure. Same with dental care. It’s very expensive. There are many dentists who offer this as a free service as they set up their own nonprofit to provide free dental care to patients or individuals who simply can’t afford it.
Cancer treatment is expensive. We know that. A lot of nonprofits are helping to cover the cost for that. And then of course, finally, there’s the research for cures, treatment, or prevention. That’s not as common, and the reason why is because it’s not making an impact immediately on individuals to the same degree or to the same extent. It can cost a lot of money to do the research, to find the cures, the treatment, and prevention as well. Again, learning from a lot of these clients about things that do work.
Toby: We have a friend and a very good musician that has an MS foundation that raises money, goes out and actually does events to raise money to bring awareness on medical conditions, MS in particular. But this is a great one, especially for passion projects.
Also for doctors who are looking for some tax relief and they want to fund something. This is another great one for them to transition into and even make a living out of as a second career or a third career. If they’re done maybe grinding it out, maybe they want to do some giving back. This is another place to create a nice landing pad.
Number five.
Karim: Number five is assisting veterans and elderly. Both, they don’t just need financial assistance. The reality is, especially veterans, they need medical care. They need counseling as well. Some are suffering from PTSD, so they need help with counseling with that, job assistance, housing, to overcome homelessness. All of these are very common.
Nonprofits come in because they know that the VA is not filling and providing. They want to fund that gap of what they’re seeing with what the VA provides and what’s really needed for veterans. It’s activities to combat isolation and depression. The financial support, the medical support, the counseling, as we mentioned before about pets and animals, and even housing to help with veterans.
Also for elderly as well. We have one nonprofit that flies them in a plane for the elderly activities, social activities. Another one takes them to see old cars because they love that. They can always connect with nostalgic things like that. Also, bingo, social events, at movies, activities that keep them socially engaged. These are the things that we see with nonprofits as well.
Toby: We’ve seen residential-assisted living qualifies. You could do transitional housing. You can do a cool one. We’ve had a couple of organizations that trained service dogs for veterans, drops the suicide rate significantly for folks that are high at risk, and does some magic stuff there. Sometimes, it’s not human beings that could reach us. Sometimes it’s animals.
All these organizations, again, you could make tax-deductible contributions to, and they’re exempt from paying tax on their profits in that revenue. It could be a great win-win if you go out there and really push these things.
Number six.
Karim: Number six is housing. It used to be number one for us. That’s what we were seeing all the time. It still is extremely popular for our nonprofit clients. Not only is it helping to assist the poor, the underprivileged, or the needy, but recovery residents. It’s very common with that. As you mentioned just a minute ago about elderly and even for veterans, providing housing, residential-assisted living for the elderly.
Also for victims of domestic abuse, but I’m highlighting here the recovery residence one. As you know, we do a lot of workshops dealing with shared housing. It’s not just housing for one family, but it’s housing for many families or individuals. If you have a four bedroom house with eight beds, you could have housing potentially for eight people. Typically, we’ll provide housing for those who are recovering from addiction.
Toby: And that’s not eight rooms, by the way, guys. That’s eight beds, which in a lot of jurisdictions—for example, for transitional housing out of incarceration for nonviolent offenders or for drug offenders—they require two people per bedroom. There are requirements on the size of that bedroom, but you could have two, sometimes three bedroom beds per room.
It’s not like you’re trying to cram them in there. That’s a state requirement or a county requirement or a municipal requirement that says, here’s what we will do. Then they’ll give you a grant to help your house out. We’ve had clients that get $75,000–$80,000 a year, plus they get a per bed fee of $800–$1000 a month as well from municipalities to do transitional housing.
If you don’t believe that’s true, we actually teach workshops on it. We’ve had a number of clients have success in that area, and house (in some cases) hundreds of people.
Karim: That’s an important thing. As you’ve said, there’s potential for funding for something like this, and get grants. There are referrals from drug courts, other nonprofits, treatment centers as well, even possibly hospitals. All of these organizations will work as referrals to be able to work with you as you provide the shared housing and transitional housing for those in need.
Toby: Absolutely. Number seven.
Karim: Number seven is animals. Who doesn’t love animals? Creating an animal sanctuary. These are all the types that we’ve seen within Anderson. Animal sanctuaries for dogs, for cats, rescue animals, goats, horses, old animals. They want to live their lives out. Circus animals, farm animals, all of these are examples of the types of animal sanctuaries that we’ve seen.
And it’s not just an animal sanctuary, but as I mentioned before, it’s therapeutic. It’s for veterans, for children with disabilities, for elderly, anyone with isolation or emotional issues. This is a great one as well. Very popular, and these get approved very quickly as well. What we’ve seen, they get approved very quickly.
Toby: You go step in, make a difference, and get something. Can you take a tax deduction for contributions at all the organizations we’ve mentioned so far?
Karim: Absolutely. They all qualify as 501(c)(3) organizations, but you have to apply for exemption. You have to get the exemption to get the 501(c)(3), so you have to apply. The IRS gives you that 501(c)(3) exemption for that.
Toby: Perfect. All right. Number eight.
Karim: Number eight is (we call it) miscellaneous. All different types of organizations, from all arts and cultural activities, to religious activities, ministry, even church. We have global waste reduction. This one actually got approved very quickly as well, several of them.
Waste is dumped in landfill, at dump sites, or oceans, and the pollution can kill people. If we do improve packaging of material, improve landfill practices, and converting waste to energy, all these are solutions to help reduce the waste. These are examples of that.
Of course, empowering women, children, underserved communities, and now finally we’re seeing victims of hurricanes, unfortunately, and wildfire and tornadoes. So disaster relief, we like to call it that, and that’s what the IRS calls it. These are the types of miscellaneous nonprofit organizations.
Toby: And these are still 501(c)(3)s eligible for donation plus exempt from tax on any of that revenue or any of the money it makes.
Karim: Absolutely. Any contributions you make, whether it’s cash or non-cash into the nonprofit, it’s tax-deductible. Any items that the nonprofit receives, it’s tax-free. Then you can make these distributions out to any individual, and none of them pay any taxes on it either as you are making distributions to support that charitable class that you intend to serve.
Toby: I wish I had a nickel for every time somebody came in, they were helping people and they’d been doing it for years, and not small amounts, but in some cases, $50,000–$60,000 a year. They don’t get any tax benefit for that. They set up an organization and did the exact same thing. They could actually get a tax deduction for the amount that they’re contributing.
They’ll eventually—depending on how long they do it and whether they’re getting any public assistance—become a private foundation, but when everybody starts, we start them as a public charity. They get these higher amounts. They have 60% of your adjusted gross income if you make cash contributions, 30% if you are making appreciated asset contributions.
Again, there’s just so much that you could do to change the treatment of these types of benefits that you might already be providing. For those of you guys who regularly give and you’re helping a lot of folks out, and you’re doing it and you’re not getting any tax benefit, it’s always worth a discussion to see whether the formal structure will unlock some of those benefits, and whether the benefits outweigh the cost of doing so.
Number nine. You’re getting close.
Karim: Which is a perfect segue to what you just mentioned just now. We have many clients who are from overseas, and they want to give back to their communities. If you give directly to these communities—I’m giving examples of orphanages, schools, hospitals, scholarships, food, clothing, shelter, like we mentioned before—these are the things you can do and are charitable, but if you give directly internationally, it’s not tax-deductible. But if you set up a 501(c)(3) that donates to do these international activities, then it is tax-deductible. That is an important thing to be able to get those benefits.
We actually set one up for a client that was from India with a cow sanctuary. They were giving hundreds of thousands of dollars to help support this internationally, and were not getting the tax deductions. We set up the 501(c)(3), they got the exemption, and now not only is he, but many of his friends and other folks as well are also donating to this 501(c)(3) to get the tax deduction as they’re going to continue to do the same activities they were doing before.
As you can see, these are all the types of examples. Even water wells are extremely popular. It’s fascinating just the information behind the water wells of how it can help children stay in school rather than having to walk miles and miles to go to another village to be able to get water, which can take 5–6 hours just to be able to get water to bring it back, just by building a water well in those villages. It removes all of those issues that come up, and it’s very common in Africa, for example.
The cost for all of these are fairly low to do these things, but these are the types of international activities that we have seen for nonprofits that want to operate internationally.
Toby: And the big takeaway is you have to set them up in the US, and then it can do international good. But there’s not, hey, I can donate to all these international organizations that […].
Karim: Yeah. Even if it’s charitable activities that they’re doing internationally, you don’t get a tax deduction unless you do it through a US-based 501(c)(3) organization.
Toby: All right. Number 10, we’re getting to the end.
Karim: All right. Sorry. Very uninspiring this one, just supporting other 501(c)(3) organizations. Your nonprofit can do any of those first nine, and in addition support other 501(c)(3) organizations that are doing the same types of activities described above. This is very common. We’ve seen organizations do a combination of these things of just doing their own activities directly, and in addition, they’re supporting other 501(c)(3) organizations that are doing these programs, too.
Toby: What’s the difference between supporting other 501(c)(3)s and setting up a private foundation where they’re mandated to give 5% of their assets every year to qualified 501(c)(3)s?
Karim: If you do it in a public charity, you’re not mandated to do that. Within a private foundation that just makes grants to other organizations, you are mandated to give 5% of your investment assets that you have that are non-charitable-use assets, to other 501(c)(3) organizations.
With that, there are restrictions. You can’t give to international organizations unless you follow specific procedures. Whereas with a public charity, you can do that, but you’re not required to give 5%. You have that flexibility to give however much or however little you want. In addition to that, again, you can do other types of activities as well.
Toby: What if somebody has a housing organization that’s a private foundation? Are they required to give away 5% of the house every year? Or is it just investment assets? Liquid assets?
Karim: Any non-charitable-use assets. if you’re using the house for a charitable use and a purpose, then it’s not included as part of the 5%. It’s just non-charitable. Typically, we say if it’s investment property that’s just collecting/generating rental income, or if it’s investments that you have in stocks in crypto, these are considered to be non charitable use assets, so you have to use 5%.
To your point about the real estate, if the real estate is not being used for a charitable purpose, you’re just using it for investment purposes, yes you have to spend out 5% of what the value of that real estate is, even if you can’t liquidate it. You still have to take that into consideration when it comes to spending 5%.
Toby: Most everybody that’s doing that is not giving away a house just to give away a house. They’re giving away a house because it qualifies for a particular type of housing, most of the cases that I’ve seen. I can’t think of a single one where I’ve seen them just give away rental properties. The rental properties generally qualify as low- to moderate-income housing. Usually, they’re setting up as a public charity anyway in trying to combat the housing crisis.
Karim: And that’s what we try to recommend to clients. You see the difference between the private foundation where it has the potential with the restrictions, and the public charity where it’s a lot more flexible to do that. We say start off as a public charity, use that—it’s going to be easier to comply with—and then if you’re not happy with it, we’ll reclassify you as a private foundation, but you’ve never seen that happen.
Toby: Yup. All right, Karim, that was very very helpful. Ten different activities that qualify, and that is fun. Let’s see, that’s the list. Children, domestic victims, what is this one?
Karim: Just a summary of who are the charitable groups that were benefiting here. As you can see, these are nonprofits. It’s specific ones from the low income to children, victims of domestic abuse. We talked about elderly, veterans, but the bottom one here is the general public. Educational organizations are an example of that. It can be the general public.
In addition, I should mention that we do combine as well. Veterans with the animal sanctuary, veterans plus education, for example, affordable housing plus education, because these two things go hand-in-hand. We talked about shared housing, so financial education, social activities, and job placement. All of these things are important in integral parts to be able to not only carry out charitable activities, but to help these individuals succeed as well, given the confidence to be able to succeed.
Toby: Okay. I appreciate it. A lot of people don’t realize, but I always joke. It is true, IKEA is a nonprofit. So always be like, hey, like Harvard is a nonprofit. Major League Baseball is a nonprofit, believe it or not. The Green Bay Packers are a nonprofit organization. There are lots of things where you’re like, what? And when you look at it, you start realizing, yeah, it’s not that difficult. As long as you’re trying to help any of these groups in your doing, so that’s your purpose, chances are you could reclassify it as a charitable activity.
Karim, if they want to get a hold of you, can I just have them put something like consult in the comments below? If they write in, let’s say, strategy, let’s do that. We’ll say, if you type in the word strategy and put it into comments below, we’ll reach out and set you up with a discussion with Karim and his team. Will that work for you?
Karim: Absolutely. If you ever reach out to us by email, some people do have our email—
Toby: We’ll put a link in—
Karim: Say, I loved your video.
Toby: Karim is very sensitive to the comments, guys. He doesn’t like it when people make fun of his hair, which I’ve never seen, but apparently somebody did once and that was it. Karim went on a bender of some sort. He’s a runner, so he probably ran like 50 miles in a day. He was so upset.
Just type in strategy down below. If you want to, just for fun, put in strategy and what type of activity you would like to do as a nonprofit activity. We’ll see it, we’ll reach out to you, we’ll give you a link so you can set up a consult, and see whether it’s worthwhile to move it forward and what that looks like. It’s not as hard as everybody thinks, and it’s very rewarding. We need more people doing good things. Karim, anything else?
Karim: I think we’ve covered everything. Did it all.
Toby: All right guys. Like and subscribe if you would, if you’re on the YouTube channel and if it’s a podcast, By all means, if somebody could benefit from this, share it out.
