156: Captain Depressio Reporting for Duty | Can Nonprofits Give Tax-Free Money to People?

Welcome to Charity Therapy, the podcast where we explore the ups and downs of the nonprofit

sector and answer your burning questions.

I'm your host, Jess Berkin, owner of Berkin Law Office, and I'm excited you're here.

Imagine hanging out with me in my super smart, funny nonprofit expert pals.

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stories and remind you, you're not alone on this journey.

So get ready to join the conversation and bring me the tough questions.

I ain't scared.

Ready to rock?

Let's dive in.

Hello, and welcome to this episode of Charity Therapy, it's me, Jess Berkin here with

Megan.

Hello, it's me, Megan here with Jess Berkin.

Yeah, I feel like that kind of sums up my feeling about 2026 right now.

It's just like, yeah, we're here.

We made it.

We're here.

I'm with you and you're with me.

And it's here we are still nothing else to be said about that who knows what's going

to happen.

I don't feel any kind of optimistic or pessimistic.

We are just here.

Yes.

Yes.

It's like a meditation on existence.

All right.

So what are we doing here?

What's up?

Today we're here to talk a little bit about starting a nonprofit and specifically when

it's maybe not the best idea.

So before we get into that though, I do have a question for you, Jess.

So lots of people decide that they want to start a nonprofit because gifts are deductible

to donors, right?

That's a big part of the tax exempt status.

But what does that even really mean?

What does that even really mean?

I'm not sure that people who want to start a nonprofit even really know what that means.

I think a lot of people assume what it means is you get your C3 public charity status.

And then people are just basically throwing money at you because there's this mysterious

tax benefit if they do.

And it has nothing to do with your mission or whether they care about it.

They're just like, oh, your C3 fantastic, take my money.

And the reality is I'm not a tax person.

I'm not in public accounting, but it seems to me that fewer and fewer people are actually

taking a deduction.

So if you're an itemizer, if you know what that is, that means you take individual deductions

for individual items on your tax return.

And if you give enough money to charity, you could theoretically get a deduction for

giving to charity.

But the number of people who do that went down a lot when I think it was the tax cuts

and jobs act.

It was like 2016.

They passed a law that basically said, hey, we're going to change the number.

And a lot of people don't itemize anymore.

So gifts being deductible to the donor still feels very important to a lot of people starting

nonprofits.

The reality is it may or may not really matter to people.

Yeah, it's a small percentage of donors who actually have a financial benefit for giving

to nonprofits.

It sounds like.

Yeah.

I think the fact that gifts are deductible is more of waving the flag saying the IRS has

blessed us and said that we're legitimate, that we we equal charity.

When you give here, we are papally blessed by one of the many commissioners that has

cycled through this agency in the last 24 months.

Yeah.

I think that's really what it means effectively for a lot of people.

Yeah, it's all about the perception of the status, not what the status actually does

in a lot of ways.

So going on that train, I have a listener question that really talks about this and will allow

you to get on your what the IRS tax exam status really means soapbox.

So.

Oh, great.

I love to read.

You ready?

So let's do that.

All right, listener writes and it says I own a couple of restaurants and we have several

events to raise money for certain causes.

Usually the money goes toward a charity or a local group, but sometimes we'll do it for

a community member who needs financial support.

The problem we're seeing is that when we give money to an individual, it messes up their

taxes for the year.

My bookkeeper suggested starting a nonprofit since nonprofit money isn't taxed.

What kind of nonprofit would do that for us?

Oh, bookkeepers, please, please, stop.

I know you mean well, but don't give legal advice.

Okay, bookkeeper says nonprofit equal no tax.

All good.

That's the math that is happening here.

Guess what that is not really it.

So, okay, I'll try not to be too rude to the bookkeepers out there.

You all are doing the Lord's work because we all know that the restaurant owners of

the world are not meant to do books and charity.

Frankly, neither are the lawyers.

We're all just sort of like, please give me the person who knows the numbers, but.

Yes, delegate.

Absolutely.

But we all need to stay in our lane.

So here's the thing.

I think this is great for this restaurant tour.

It's a really great business idea.

It's a really easy way to have a marketing campaign that's like, Hey, we're going to give

back to the community.

Every time you eat here, X percent is going to go to this organization.

You see this a lot with school groups teams, they're like, Hey, come eat at the local

whatever fast casual restaurant and X percent of profits are going to get in.

Right.

Like this makes sense.

It happens all the time.

The problem is when we do it for a community member who needs financial support.

So a go fund me for a person, you walk up to the counter at a restaurant or a store

and you see, you know, little Timmy broke his leg playing hockey and his family can't afford

the medical bills, throw some change in the jar.

That's not technically charitable from the IRS's perspective.

That is giving money to a taxpayer and you can do that, but you don't get to call that

a tax exempt activity.

So starting a nonprofit doesn't really change that because you can't say, Hey, we're starting

a nonprofit and now we want you to give money for little Timmy who has impossible medical

bills and we're going to run it through.

You already can hear the tax fraud happening as I say these words, we're going to wash this

money through this nonprofit so you can claim a deduction and then we're going to give

it to little Timmy.

Well, that still doesn't work, right?

And that's a whole different episode and we can get into to that maybe on a different

episode about like private, environment and blah, blah, and how would you do that?

But you can never just raise money for Timmy's medical bills and if you have donors saying

I want this dollar to go to Timmy, that's actually called a step transaction and everybody

gets in trouble if IRS catches you doing that.

So it's a bad deal.

Now I want to circle back though to when we give money to somebody it messes up their

taxes.

Well, yeah, because it's income, it's going to be income to Timmy's family.

And that's, but the thing is that's what they need.

They need more income, you know, if they had a different paycheck amount, they wouldn't

need financial resources, but if they had a different paycheck amount, they would have

a different tax bill, right?

So the problem isn't that it messes up their taxes.

The problem is that they have not adequately planned for the bill that's going to come

because you're surprising them with this big bucket of money, which is amazing.

But there are some like downstream effects that can happen.

So if you're like on social media, you'll see there's these creators out there like the

one that comes to mind is this guy, SB Mowing, and he like has a landscaping company or

he's a mowing service, but he just makes these YouTube videos basically where he goes

finds the worst yard on the block.

It's usually some like little old lady who just can't handle cutting the grass anymore.

Because this massive overhaul cuts back everything, it's amazing transformation and people

will want to give.

So he'll set up a go fund me and you'll see the lawyers like me screaming in the comments,

help her set up a trust, get her in touch with an estate planning lawyer because you can't

just dump a half million dollars on the little old lady without there being negative consequences.

So you have to plan ahead.

And so I think that's the real takeaway here and I'm not a tax pro.

I can't give tax advice, which reminds me you also cannot give anybody tax advice.

You can't give your donors tax advice.

You can't give your beneficiaries tax advice.

But if you are trying to help little Timmy set up a go fund me, you can help that person

also be prepared for the consequences of having this large cash infusion that they weren't

expecting.

Right?

Sometimes it really is just about paying the bills.

And in that case, you don't need to give the money to Timmy's family.

You could just pay the bill, right?

And so that's a way to avoid the immediate problem.

But I can already like feel in my gut that that's wrong and that that's going to be income.

And if we had an accountant on here who did public accounting, they'd be like, no,

you can't just pay the bill for somebody that's going to be considered income.

So I just think you have to help the person plan.

And I absolutely would not want anybody to start a nonprofit for the purposes of just

making one person's taxes better or three people's tax situation better a few times a year

because running a business, running a restaurant is not easy.

It is not cheap.

You're not getting rich doing this.

Most restaurants have a very thin margin.

You don't need to be taking more of your time and resources and your money and paying

to start a whole new corporation.

That's more regulated like a Fortune 500 company and has all this compliance.

So I would just say, let's stick with how picking a charity and helping the charity.

And if we're going to pick a person, just know that it's not deductible and you're going

to have to be mindful of how this is going to impact that person's life.

And you know what?

This is what I say to my nonprofit clients, right?

All the time, I don't care if you have to pay some tax once in a while, just pay the

tax.

They need the money.

They need the money to pay the bills.

So just make sure that they are connected with the tax planner and that they get the advice

and that we know we have to set aside X amount of dollars for the tax money because that's

really what we can do to help people.

Anyway, I'll step back for my soapbox now.

Great, great.

Love it.

In this situation, it really sounds like, you know, this is a local community driven thing.

Like the restaurant tour, the general manager, whoever probably knows this family to some

degree that is like in the restaurant.

Absolutely.

This is a certain amount of, you know, this is not, we're dumping $5 million on someone

who's not expecting it and is going to like have, you know, downstream consequences that

don't make any sense or whatever, like you, you're in conversation with these folks.

And so it can be part of the conversation.

Like you say of like, Hey, this is going to help with this bill and make sure you talk

to your accountant about how much money you need to save or whatever, you know, it's

just like as, especially if they're, you're talking like thousands and thousands of dollars

of medical bills that is a never ending pit to pay, you know, that you just want to make

sure to not put all of the money toward the bill knowing that you're also going to get

a tax bill.

Yep.

Yeah.

Okay.

I have a couple of takeaways here that I think can kind of sum this up.

So first tax exemption for nonprofits does not mean you never need to think about taxes

at all.

There are taxes to be paid for certain kinds of activities.

And also it does not mean that your recipients or donors never have to think about taxes.

There are still taxes in and around all parts of the nonprofit sector.

So get that out of your head that nonprofit equals no tax ever.

If only I knew more of the words to the Beatles tax man song, I would say or need you right

now, but I just, I can't.

Well, I'll make you look it up and drop in a clip later or something.

We'll see.

I don't think anybody wants to hear that.

So that's the first one.

The second one is that you cannot give tax advice as a nonprofit to your donors who are

asking about deductibility to your beneficiaries to anybody.

That is not an appropriate way to use your platform.

But thirdly, you do not need a nonprofit in order to give money to other people as a

business.

If you want to give back to your community, you can just do that.

And there's often not a lot of benefit to you to start a nonprofit in order to continue

to do that, particularly not as a way to avoid causing undue tax burden on your beneficiaries

here.

So the idea that a nonprofit will fix all of these problems is just simply not true.

And you can continue on your good works through this company, the way that you've already

been doing them.

Yeah.

And obviously like a lot of this is like, it depends and how much of this you're going to

do.

And like, sometimes the answer is going to be different with different facts.

This is not legal advice.

You should talk to a lawyer, you know, like all the things.

Like just generally, if twice a year, you're going to help raise money for Timmy's hockey,

broken leg, like bro, don't start a nonprofit.

Yeah.

The juice isn't worth the squeeze at the end of the day for something like that.

All right.

Well, I think that about wraps it.

I think it does.

I'm, I feel like I was kind of a Debbie downer on this one, but you know what, sometimes

that's the way it goes.

Well, I think the rain on people's parade sometime.

I think the bottom line is not really a Debbie downer so much as like, guess what?

You don't have to do a whole bunch of extra work for this thing that sounds like a good

idea.

You're already doing the great idea and you can just keep doing it.

Yes.

That's true.

That's great news.

That's true.

All right.

Well, if you thought this was a great episode and that I was not kept in depression, you

know what?

Give us a rating.

Share it with a friend.

If you know somebody with a small business who's maybe listening to their bookkeeper who

doesn't know what they're talking about, hey, share this episode with them.

If you've got a question or a story or a different set of facts that you want us to react

to, send me a note online, charity therapy.show and as always, thanks for listening.