Nonprofit Donor-Advised Fund Regulations: A Look Ahead
Donor-Advised Fund Regulations and the Road Ahead for Nonprofits
The popularity of donor-advised funds (DAFs) is soaring, attracting significant contributions while offering tax advantages to donors. However, the IRS recently proposed regulations that have sparked debate within the DAF industry. This article explores the basics of DAFs, analyzes key proposed regulations, and discusses concerns raised by stakeholders.
Understanding Donor-Advised Funds
DAFs allow donors to contribute assets to a sponsoring organization that manages the funds and distributes them to qualified charities upon the donor’s recommendation. These contributions often include cash, securities, and even cryptocurrency. Donors receive an immediate tax deduction and enjoy tax-free growth on invested assets. Sponsoring organizations typically charge administrative fees.
The IRS Weighs In
After years of limited guidance, the IRS proposed regulations aimed at clarifying key terms and donor-advisor activities. However, these regulations haven’t addressed all stakeholder concerns. Here’s a closer look:
- Definitions: The IRS proposes definitions for donors, donor-advised funds, donor-advisors, and advisory privileges. These definitions are broad, potentially impacting current practices. For instance, the donor definition may necessitate revisions to existing donor lists by sponsoring organizations.
- Distributions: The proposed regulations broaden the definition of distributions to include disbursements and payments beyond charitable transfers. While some reasonable fees are excluded, this expansion raises concerns within the DAF industry.
The IRS’s proposed regulations on donor-advised funds raise concerns about the potential impact on charitable giving and the ability of nonprofits to receive timely support.
Community Concerns
Several proposed regulations have drawn criticism:
- Single-Entity Funds: Previously, organizations distributing all grants to a single charity weren’t considered DAFs. This proposal eliminates that distinction, potentially discouraging board members from making charitable contributions.
- “Daisy Chain” Distributions: The IRS emphasizes preventing DAFs from benefiting a single individual. This proposal discourages “daisy chain” distributions, where donors recommend grants to charities with influence over beneficiary selection, potentially hindering charitable intent.
- Investment Advisor Penalties: The regulations impose significant tax penalties on investment advisors treated as donor-advisors. This could stifle participation by qualified financial professionals.
Unresolved Issues
The proposed regulations fail to address other concerns within the DAF community. A major point of contention is the lack of regulation on how long funds can remain undistributed within a DAF. Donors, advisors, and non-profits alike seek clarity on this issue.
The Road Ahead
The IRS will now consider public comments on the proposed regulations. They can refine the regulations, maintain the current proposals, or start anew. Stay tuned for further updates on these evolving regulations.
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Dylan manages a variety of accounting and auditing engagements for the firm’s Dayton, Ohio, clients in numerous industries, including construction, manufacturing, and technology. He has an extensive background in auditing nonprofit organizations, including those that are recipients of federal funding, as well as experience in auditing employee benefit plans.