Helping your nonprofit clients make more use of donor-advised funds

Tax Law and News Nonprofit

Donor-advised funds (DAFs) are a type of brokerage account for charitable contributions. They’re less expensive and more straightforward to set up than other funds. However, you should be aware of some unique aspects when your clients receive donor-advised funds.

It would be best to let wealthier donors know that they can give to a nonprofit and reap numerous special financial breaks – at the same time.

What donors should know

According to the National Philanthropic Trust’s 2019 DAF Report, contributions to donor-advised funds rose by 23 percent, or a combined $5 billion in 2017. In 2018, contributions rose again by more than 20 percent, or $6.2 billion. Both periods outpaced the compound annual growth rate from 2014 to 2018.

DAFs seem to be sending more money toward charities than ever – and the time may be now for your nonprofit clients to explore DAFs for their donors.

DAFs offer several advantages over foundations and other tools for significant contributions to charities. They can also be easier to set up and maintain – and come with substantial benefits for the donor:

  • Available in every U.S. state, two territories, and the District of Columbia, DAFs are created and sponsored by 501(c)(3) organizations. They can include community foundations, as well as single-issue and national charities.
  • Fidelity, Vanguard, and other brokerage giants have designation divisions that handle DAFs for investors and donors. The organization has legal control over the fund, but donors decide how and when to invest the contributions and direct grants to other charities.
  • Administrative fees can be much less than those of other brokerage accounts. They offer easy setup and, in some cases, no minimum to open an account.
  • Note that nonprofits cannot use DAFs to make qualified charitable distributions from retirement accounts.

DAF organizations also try to tune into what and where donors want to give. Vanguard Charitable has a new online tool, for example, to connect donors with nonprofits that support the geographic areas hit hardest by COVID-19.

Tax advantages of DAFs

DAFs offer donors flexibility in timing and choices for their philanthropic wishes. Still, one of the more objective motivations can be the various tax advantages of giving through these funds, rather than directly to charities.

For example, DAFs have become incredibly popular with donors looking to “bunch” multiple years’ donations into one year. This concept of grouping multi-year deductible charitable deductions became popular after 2017. The Tax Cuts and Jobs Act significantly raised the standard single-year deduction to $12,400 for individuals and married couples filing separately. DAFs can allow one big donation, topping the year’s standard deduction and improving the donor’s tax situation. The donation is then granted over more than one year, streamlining the charity’s cash flow in troubled times.

Other tax benefits to donors include the following:

  • Assets in the fund appreciate tax-free; interest and capital gains on assets in the fund are not subject to income tax.
  • Donors can also contribute appreciated long-term securities, getting a charitable contribution deduction for their fair-market value while reporting no capital gain on the transfer.
  • The assets contributed are outside of a wealthy donor’s estate, shielding them from those taxes.

Streamlining the books

Nonprofits certainly have particular issues maintaining a clean set of books, setting up their bookkeeping systems, budgeting, and forecasting cash flow. Accounting for DAFs is one aspect, but there are quite a few other considerations.

Where to begin? In our firm, we typically start by looking at pain points of reporting. If clients are using QuickBooks®, an ideal solution for nonprofits, you’ll find that they are probably doing quite a lot of manual reporting outside of QuickBooks in Excel. As a result, you should review a sample of a client’s current reporting to design a better way to get an organization of what they need from QuickBooks without manual manipulation in Excel. 

For example, by finding ways to more effectively use the customer/job lists, classes, and the chart of accounts, nonprofits can better track different programs, revenue streams, and direct and indirect grant funds received or expensed. In particular, utilization of the job cost feature can require quite a few changes to an organization’s processes. However, this will give the organization the grant/program reporting they are looking for, especially when those grants or programs run longer than one year, or when the grant year isn’t the same as their fiscal year.

Better organization and setup of the various lists available in QuickBooks, and redesign of client workflows, ultimately lead to better reporting output, giving nonprofits more visibility into where they are and where they are going.

DAFs are here to stay as a tool for nonprofits. Your clients could consider a donors’ survey to see if they already have access to this burgeoning potential funding source. Clients can also track which donors are interested in DAFs with a DAFwidget on their organization’s website.

Editor’s note: This article was originally published by CommPro.