Do you have questions about qualified disaster relief funds? These can be different for different types of organizations. Let’s look at some details on this.
What is a qualified disaster?
Per IRC Code Section 139, a qualified disaster:
- Results from terrorist or military actions
- Results from an accident involving a common carrier
- Is a Presidentially declared disaster
- Is an event that the Secretary of the Treasury determines to be catastrophic
What are qualified disaster relief funds?
Qualified disaster relief funds provide aid to disaster victims and those facing emergency hardship. They include aid for the following types of expenses as defined by the IRS:
- Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster
- Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a qualified disaster (a personal residence includes both a rented or owned residence)
- Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a qualified declared disaster
They do NOT include the following types of expenses as defined by the IRS:
- DOES NOT INCLUDE– payments for expenses otherwise paid for by insurance or other reimbursements
- DOES NOT INCLUDE– income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation
Who qualifies to receive these funds?
Individuals– some examples the IRS provides of individuals who qualify are those who are:
- Temporarily in need of food or shelter when stranded, injured, or lost because of a disaster
- In need of long-term assistance with housing, childcare, or education assistance because of a disaster
- In need of counseling because of trauma experienced as a result of a disaster
Businesses– some examples the IRS provides of businesses that can receive these funds are businesses that use the funds for the following charitable purposes:
- To aid individual owners who are financially in need or otherwise distressed
- To combat community deterioration
- To lessen the burdens of government
Specifically for 501(C)(3) organizations giving funds, the IRS does qualify that those funds given to businesses must be a reasonable means of accomplishing a charitable purpose (listed above). In addition, any benefit to a private interest is incidental to the accomplishment of the charitable purpose.
What kinds of organizations can give qualified disaster relief funds?
All organizations can give these funds. However, the rules vary based on the kind of organization.
Which rules apply to all organizations?
The rules listed above apply to all organizations except for the rules on 501(C)(3) organizations. Additional rules apply to charitable organizations because the funds used were given to the organization specifically for charitable purposes.
What specific rules apply to 501(C)(3) organizations?
The funds used must be given to a “charitable class,” not specific individuals, and a needs-based test should apply to all who are given funds.
- A charitable class must “be either large enough that the potential beneficiaries cannot be individually identified, or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provided assistance.” The key to this is the class must not be for specific people if it relates to a specific event, or if it is a specific group of people, the assistance provided must be for an indefinite period. Here are a couple of examples:
- If the assistance is only for a specific hurricane, the potential beneficiaries need to be the entire community affected by that hurricane.
- If the assistance is only for the employees of an organization affected by a hurricane, the charitable class would need to be all current and future employees of the organization affected by all current and future hurricanes.
- Needs-based testing applies after the initial disaster is over. These rules are not as strict during the immediate aftermath of the disaster. To appropriately implement needs-based testing, the IRS recommends the following documentation:
- A complete description of the assistance
- Cost of the assistance
- The purpose for which the assistance was given
- The charity’s objective criteria for disbursing assistance under each program
- The recipient selection process
- The name, address, and amount given to each recipient (except for short-term emergency assistance)
- Any relationship between the recipient and officers, directors, or key employees of or substantial contributors to the organization
- The composition of the selection committee approving assistance
- For short-term emergency assistance, document the date, place, and estimated number of victims assisted
Are any additional tax filings required?
There are no tax filing requirements for these funds. Qualified disaster relief payments are considered gifts to individuals and are not taxable to individuals. The only time disaster relief payments are taxable is if the payments would otherwise be compensated by insurance or other reimbursements.
Does providing qualified disaster relief funds make an IRS audit more likely for an organization?
There is always a chance for an audit, but there are no specific reasons providing these types of funds would open an organization to an increased likelihood of an audit.
Can your organization pass through these funds to another organization to distribute? If yes, what requirements does your organization have (if any)?
The main requirements around these funds relate to the entity distributing the funds. So, yes, funds can be given to another organization to distribute to those individuals or organizations that qualify.
Depending on the type of organization managing the disaster relief fund, the type of organization receiving the funds, and the amount provided, there may be additional reporting requirements on managing the organization’s tax return.
- For example, if a 501(C)(6) organization provides $10,000 to a 501(C)(3) that will use the funds for qualified disaster relief assistance, the distributing organization (C)(6) would be required to report the $10,00 financial assistance on Schedule I of the (C)(6)’s Form 990.
If a for-profit organization distributes disaster relief funds, the for-profit will only be allowed to take a charitable deduction if the funds are provided to a 501(C)(3). The additional requirements on 501(C)(3) organizations around this topic help ensure the funds are being used for the public and are not gifts to specific individuals or businesses.
Contact us if you would like to discuss qualified disaster relief funds.