Disaster Relief Charities – IRS Tax Rules

The United States is entering the most natural-disaster-prone time of the year. Tornadoes are most likely to occur in May, and the Atlantic hurricane season starts on June 1. Not-for-profits that work as disaster relief charities providing aid to disaster victims — whether it’s medical care, food, clothing, shelter, cash or rebuilding assistance — are gearing up for potential emergencies. But if your organization operates in this space, know that when dispensing aid you must observe certain IRS rules.

Defining Charitable Activities

Disaster relief organizations are allowed to provide short-term emergency assistance and long-term aid to help ensure victims have necessities. Relief may also come in the form of cash grants or vouchers. Providing such relief to individuals qualifies as a charitable activity because it aims to relieve human suffering.

However, your nonprofit must assist a “charitable class.” A charitable class should be either large enough that the potential beneficiaries can’t be individually identified or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits. In addition, you must apply needs-based tests, meaning you can’t distribute aid to individuals just because they’re disaster victims. Decisions about how funds will be distributed must be based on an objective evaluation of needs at the time grants are made.

But practicality and sympathy for victims’ immediate plight can be considered. For example, take a charity that distributes blankets and hot meals to natural disaster victims. In the immediate aftermath of a storm, the charity doesn’t ask victims for proof of financial need. However, as time goes on and victims and their community begin to recover, it may be appropriate to conduct individual financial needs assessments.

Aiding Businesses

In addition to helping individuals, your charity generally can provide disaster aid to businesses, so long as two conditions are met:

  1. Assistance must be reasonably related to the accomplishment of a tax-exempt purpose. Businesses aren’t members of a charitable class and can’t, therefore, be appropriate charitable objects. However, distributing aid to them can achieve charitable purposes, such as preventing community deterioration or reducing the burden on local government.
  2. Any private benefit to businesses must be incidental. An eligible business might not have adequate resources, conventional financing or insurance coverage that would enable it to recover from a disaster. Disaster aid organizations also need to determine that businesses they assist wouldn’t be able to remain in the community without their intervention.

Maintaining Records

To prove your organization’s compliance with IRS rules, maintain good records. Document amounts paid, the purpose of payments and evidence that payments were made to meet charitable purposes and victims’ needs. In addition, document:

  • Your organization’s objective criteria for disbursing assistance,
  • How specific recipients were selected,
  • Names and addresses of recipients and the amounts supplied to them,
  • Any relationship between recipients and your charity’s officers, directors, key employees or substantial donors, and
  • The composition of the selection committee approving assistance.

Note an exception: Organizations distributing short-term emergency assistance aren’t expected to record the names, addresses and amounts provided. Instead, document the date, place and estimated number of victims assisted.

Other Rules May Apply

There are other IRS rules that might apply to disaster relief charities. Our Not-for-Profit Specialists can answer your questions about complying with rules for tax-exempt organizations.

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DISCLAIMER: This blog is provided for informational purposes only and is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant. Presentation of the information in this article does not create nor constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, the evolving landscape surrounding these topics is supported by regulations or guidance that are subject to change.

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