The word fashla is Hebrew colloquial for “screw-up”. And yes, even your accountant, an Israeli charity’s best friend, can make a few.

As a banker I see this particular slip-up more often than you think. Here are two ways to avoid your accountant inadvertently putting your organization’s bank account in the red. 

PRELUDE

In Israel, the accountant fulfills a crucial role for the amutah [Israeli Charity].

It is your accountant who will point out pitfalls to avoid and best-practices to follow. Assuming you follow your accountant’s advice, s/he will defend your tax-deductible status from less-than-cooperative regulatory bodies. Additionally, many accounting firms also offer bookkeeping services, making them a one-stop-shop for all a charity’s needs.

For these reasons and more, many nonprofits in Israel will leave with their accountant a signed check book so that the s/he can pay relevant bills without having to “bother” the nonprofit.

While efficient in theory — and assuming that an organization is aware of the risks and has obtained the agreement of all relevant stakeholders — there needs to be some ground rules before deciding to put this plan into action.

1. NOTIFY THE NONPROFIT BEFORE ANY PAYMENT

Generally, the accountant’s checkbook is used for payments to Mas Hachnasah [Tax Authority] and/or Bituach Leumi [National Insurance - think Social Security], payments that potentially differ each month and whose computations are done by the accountant. The idea is to take out the middle man — the organization — and just have the accountant pay the relevant government bodies directly. Like I said, efficient.

It can happen that a nonprofit will forget to incorporate the accountant’s checkbook into its cashflow management. The age old saying of “Out of sight, out of mind” comes to mind (no pun intended) when thinking of this scenario.

Letting an organization know of any upcoming payments can avoid these “unexpected” withdrawals. Government payments, in particular, are generally not a last-minute item and can be planned in advance. It probably isn’t a bad idea to have a working agreement regarding minimum “notify” times.

2. TO THINE OWN SELF BE TRUE

The other instance where accountants tend to write their own check is when they…[wait for it]…pay themselves.

Yep.

Similar to the government agencies above, monthly payments to the accountant are not always the same. Additionally, there is the added benefit of convenience for the accountant; after all, the checks are already signed and sitting in his office.

This scenario mimics the first in terms of “Out of sight, out of mind” but has the additional element of Conflict of Interest.

While I wouldn’t say that an accountant who writes him or herself a check without first notifying the client has immediately crossed any red lines, it might be indicative that this s/he isn’t a stickler for details — and a propensity for details is severely required by an accountant.

In addition to a general Conflict of Interest policy for the nonprofit, there should be an prearranged agreement of which beneficiaries will be paid from the accountant’s checkbook and which will be paid from the organization’s checkbook.

CONCLUSION

The ultimate fiscal responsibility lies with the organization. At the same time, accountants are too important to Israeli charities for there to be doubts or misgivings.

The relationship between accountant/bookkeeper and nonprofit organization is as much about expertise as it is about personalities. If these fashlas happen more than just a few times it might be a sign that this accountant is not a good match for the organization (or vice versa).

Tizku Lemitzvot,

Shuey

Disclaimer:  This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Photo Credit: “Empty Pockets” by Dan Moyle (Flickr)

“Why or why not should one be incorporated?” is the question American lawyer Don Kramer asked in his Weekly E-Newsletter back in 2010.

For Mr. Kramer, the question is a legal one. The pros and cons that he outlines deal with personal liability and procedural/substantive questions.  His fantastically succinct answer refers to state statute and case law.

For some, incorporation is relevant not because of legal concerns but rather taxation benefits.  Others might contemplate incorporation through the lense of fundraising and its effects on donors.  And yet to others, the act of incorporation or registration is simply a question of time and money — lacking either of the two might automatically render incorporation as an unwarranted expense.

As a banker, and more specifically, as a banker that deals with international nonprofits, I’m interested in easing a charity’s ability to open and manage a bank account.

So like any good Jew, I’ll answer a question with a question.  When seeking to solve the riddle of “Should I incorporate?” I ask the following: Will your charity operate internationally?

If the answer is yes, then incorporate.  It will make banking abroad much easier.

WHAT IS INCORPORATION

The definition of Incorporation as listed on Investopedia.com:

The process of legally declaring a corporate entity as separate from its owners.  Incorporation has many advantages for a business and its owners, including:

1)   Protects the owner’s assets against the company’s liabilities
2)   Allows for easy transfer of ownership to another party
3)   Achieves a lower tax rate than on personal income
4)   Receives more lenient tax restrictions on loss carry forwards
5)   Can raise capital through the sale of stock

A founder might consider incorporating his project or program for any of the reasons listed above, to allow donations to be tax-deductible or just to seem more legitimate in the eyes of donors, to name just a few reasons.

(Again, Don Kramer very nicely summarizes two benefits of incorporation in the article referenced above.)

The regulatory requirements demanded of Charities, as can be expected, vary from country to country; some governments give nonprofits the option to incorporate, others force it, while other deny it outright.

INCORPORATION: THE COMMON DENOMINATOR

The question whether to incorporate is not one of right or wrong, but rather, one of priorities and circumstance.

The United States, among other countries, does not force incorporation upon charities. As Mr. Kramer points out, a U.S. nonprofit can be formed as a Trust or an Unincorporated Association.

Since not all legal entities are internationally recognized (or even exist overseas), problems may arise when organizations that are not incorporated do business abroad.

As a general rule, when choosing to operate internationally it is best to fit into preexisting or predefined conceptions.  This is true for bank accounts and other institutional processes where there is a need to define the legal entity of the account owner.

Corporations, in contrast to entities like a Trust or an Association, exist in most countries — albeit with different legal and tax ramifications — and are generally listed with some governmental registry and/or monitoring system. As such, for-profit and nonprofit corporations can generally rely on the somewhat universal concept of incorporation to become recognized and establish an official presence abroad.

Israeli institutions are sometimes unsure — and rightfully so — how to categorize charities that are unincorporated abroad, created as legal entities that have no local equivalent.  This confusion may delay or hamper a nonprofit’s operations.

In conclusion: while a nonprofit doesn’t have to incorporate to do business abroad, it is definitely worth considering.

What has been your experience?

Tizku Lemitzvot,

Shuey

I was hesitant to write this piece as it touches on many legal issues, and I am not a lawyer.  However, after helping a few unincorporated charities open accounts, I believe that spreading the lessons learned from these experiences is important.  As always, please refer questions to the appropriate experts.

Disclaimer:  This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Photo Credit: “Registration Desk Sign” by NHS Confederation

Paypal is one of the leading Internet-payment options in the world for for-profits and nonprofits, alike.  With only a PayPal logo and some code easily inserted onto a website, payments are a breeze.  And with over 230 million PayPal users worldwide, the chances are good that your customer or donor either already has a PayPal account or trusts the company enough to register for a new one.

Combine the above with the one percent discount PayPal offers qualifying charitable organizations and you’re looking at a strong argument why PayPal should be the online payment-system of choice — for local donations.

However, for international fundraising, PayPal’s “cross-border fees” should prompt nonprofits to tread carefully before jumping head first into this particular pool.  

A SCHOOL PURSUES TIME SAVING MEASURES

A little over two months ago, a friend that sits on the Board of a local (a.k.a. Israeli) educational institution called me with some questions about PayPal.  I’ll repeat some of our conversation as I believe the school’s challenges are shared by many.

The Israeli school also has an international program, specifically a large contingent of students from the United States.  To improve cash flow and minimize aggravation, the school was pursuing ways to get the students to pay their down payment in a more a timely manner.

Someone suggested PayPal and the school was hooked. Written payments were a multi-step process — reading the letter, finding the check book, and then actually having to mail the check — that was failing to encourage timely payments.

With the introduction of PayPal into the equation, the school followed up a letter campaign with an email that contained a link to pay via PayPal.  The result was right on target.  In just a week over 40% of the students had paid their down payment.  A far higher number in a far shorter period of time than ever before.

It was then that the school wanted to forward the money collected from their PayPal Israel account to their bank account in Israel.  That’s when things took a turn for the unexpected and I was subsequently called.

REDUCED RATE FOR NONPROFITS

PayPal understands the important role it plays in fundraising. Whether for altruistic or capitalistic reasons, the company graciously offers qualified nonprofit organizations with a reduced rate of 2.4% — instead of the regular 3.4% handling fee — a very competitive rate.  (And let’s be honest, nothing in life that’s worth it, is free.)

However, when money arrives from outside your registered country, PayPal adds other fees to the mix.

But first, some ground rules…

PAYPAL 101

Principle 1: Recipient Pays the Fees

Whether sending a donation or payment, the recipient/seller pays the fees.  The service is essentially free to the sending/buyer. In other words, the nonprofit absorbs any and all costs.

Principle 2: Local Organization Connects to Local PayPal

PayPal exists in tens of countries.  Essentially, each country is a separate corporation.  So nonprofits in Israel, for example, will open a PayPal account with PayPal Israel.  American charities will register with PayPal USA. And so on.

Principle 3: Money Released Only to Local Bank Accounts

One of the benefits is that PayPal can accept money from other PayPal accounts throughout the world in a variety of currencies.  However, the local PayPal company will only release the money to a bank in the same country.  So PayPal Israel, following the example, will only release an organization’s money to a bank account located in Israel.

Principle 4: Money Released Only in Local Currency

Regardless of the currency in which the money was originally sent, PayPal will only release the money in the recipient’s local currency.  Thus, PayPal Israel will only release (and obviously convert) the money in New Israel Shekels.

COSTS CAN MORE THAN DOUBLE WHEN ARRIVING FROM OVERSEAS

The various additional charges can more than double the 2.4% modest fee to a somewhat daunting 5.4%.  This is assuming, of course, that the nonprofit is actually approved for the 1% discount mentioned earlier. (Otherwise, it’s 6.4%.)

Continuing the example mentioned earlier, this Israeli educational institution opened a PayPal account with PayPal Israel.  Money arrived from outside Israel, in this case from the United States, incurring a “Cross-Border” Fee.  As the money was received in Dollars, when the order was issued to PayPal to release the money into the organization’s bank account in Israel, it was then converted into Shekel, incurring a Conversion Fee.

Base Price = 2.4%
+ Cross-Border Fee = 0.5%
+ Conversion Fee = 2.5%

Total = 5.4%

What I didn’t include, but which is important to note, is the actual rate of exchange. It is quite possible that the rate itself isn’t the best.  While not an actual fee, a poor rate of exchange does ultimately mean that less money reaches the charity’s coffers.

HAPPY ENDING?

Just so that I don’t leave you in suspense…

As you can imagine, the call I got from this particular board member was to find out if there was anyway to get the money out of PayPal without paying the higher rate of 5.4%.  Unfortunately, there was no way to avoid paying the 5.4%, short of returning the money back to the students’ accounts.

It is important to note that the misunderstanding of the fee structure wasn’t necessarily PayPal’s fault.  Sometimes, misunderstandings do happen (not that that made him feel better about the situation).

BOTTOM LINE: USE PAYPAL FOR INTERNATIONAL DONATIONS, OR NOT?

Depends. (Yeah, I know that seems to be my answer for just about everything.)

The following is a list of considerations that should provide some concrete information to help answer this question:

1. Ease of Use

Whether for local or international fundraising, donating through PayPal is a cinch.  Let us not forgot the percentage increase of students that paid their down payment.  Time is money, and getting your money in a timely fashion could in the end certainly be worth the investment.

2. ETA (Estimated Time of Arrival)

PayPal minimizes lag, helping the money reach its intended destination in a timely fashion.  Once the PayPal account is setup (arguably, the biggest unknown of this whole equation), money can be in the nonprofit’s bank account and ready to use in just day(s) after the payment is made.

3. Cost

So the price can jump up to 5.4% of the donation, this doens’t mean that other options are cheaper.  Yes, it is higher, but probably not the highest.

4. Tax Deduction

PayPal is merely a funnel, not a conduit.  Those foreign organizations that have tax-exempt status can issue tax-deductible receipts through PayPal. Those that don’t, might need another option.

5. Transparency

When fundraising, donors like to know who is getting the money and that it is being received. PayPal receipts clearly show who received the money and that the money arrived in the beneficiary’s PayPal account.

Whatever you decide, be sure that your decision is based on rational factors.  It is the only way to measure the service’s effectiveness and to provide adequate answers should curious donors question your choice of payment method.

Tizku Lemitzvot,

Shuey

Additional Resources: 6 Questions to Help Choose the Right Conduit Organization

Disclaimer: This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Photo Credit: Free Money Collection in Cash by epSos.de

The fiscal responsibilities of an American charity have become more complicated in recent years. Increased scrutiny from the IRS, more intricate tax documentation, the recent economic crisis, and donors’ need for transparency, are just a few of the challenges facing the sector. When a charity operates internationally these difficulties are only exacerbated. These global organizations are expected to be familiar with regional and global charity regulations, comfortable working in foreign languages and cultures, able to cope with inherent increased expenses, and capable of forging new relationships – all while maintaining a high level of accountability.

A powerful tool in helping a “Friends of” organization cope is an additional account abroad in the country in which it operates. When used to its potential, this kind of account is invaluable.

(For this purposes of this article, I’ll be using Israel as my example, as American fiscal support for Israel is wide-spread and well documented.)

The Benefits of Maintaining an Account in Israel

1. Deposit Checks in Israel

Checks designated for the U.S. charity that are received in Israel can be deposited locally. Because the account in Israel is owned by the American charitable organization any check deposited in the account can receive an IRS tax-deductible receipt. Donors can write the check while the feeling is hot, as opposed to waiting until they return back home to the United States. The organization can save: (1) money by not using postal or delivery companies; (2) time as checks can be deposited immediately in the Israel account, and; (3) hassle as there is no need to hold on to checks to mail them in bulk, photocopy and catalog mailed checks, worry about lost mail, etc.

2. Wire Monies to Israel when Convenient for the U.S. Charity

Similarly, because the account is owned by the American entity, money sitting in the account in Israel still shows in the American organization’s books. This allows the nonprofit to transfer funds according to their own schedule and not just when Israel charities need support. With this flexibility, the U.S. nonprofit can cut costs by transferring funds in bulk and increase feelings of control, while at the same time reducing the hassles of constantly operating on someone else’s timetable.

3. Transfer Funds Immediately to Israeli Nonprofits

As money can, theoretically, already be in the U.S. charity’s account in Israel, when support is approved, money (converted and) transferred the same day. No longer are groups on both sides of the ocean dependent on anonymous, ambiguous banks to make sure that money is transferred in a timely manner.

4. U.S. Nonprofit’s Israel Account can Act as Collateral

Should an Israeli organization connected to or supported by the U.S. charity need credit – whether in the form or a loan or line of credit – the American account can act as collateral. This allows money that the “Friends of” organization prefers stay under its ownership do so while still providing the necessary credit to a worthy Israeli nonprofit. (ex: This can prevent the undesirable situation when an American organization would have to “loan” funds.)

5. Pay Expenses Directly from Israel

Any type of expense can be paid locally – whether flights, hotels, or travel expenses – from the “Friends of” account in Israel. This allows for payment in local currency (i.e. shekel), as opposed to dollar, which can be cheaper both in terms of actual cost and associated fees. Additionally, an account abroad provides a variety of payment options to the American charity; such as check, wire transfer or credit card. Furthermore, the American entity can opt to pay for certain expenses directly instead of the Israeli recipients to minimize Israeli tax or charity regulatory complications that might occasionally surface.

6. Greater Oversight in the Eyes of the IRS

While the United States Government acknowledges the need for international charity, it is concerned that US based nonprofits might not exercise adequate control over its funds or be subservient to foreign organizations. Maintaining an account overseas where the American entity operates – providing that the Foundation and the Keren avoid overlaps in its board membership and authorized account signatories, among other things – is a hands-on management approach that demonstrates to the IRS a high level of budgetary control and transparency.

Closing Words…

Please note that, as said before, an account managed in Israel by the American tax-exempt organization is still considered under the ownership of the “Friends of” charity and should be treated as such. Additionally, many of the tips raised in this article are not simply about banking and require the consultation of a charity’s Board of Director and its accountant/lawyer.

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professional. Read the full disclaimer.

In Israel, more than in most countries, foreign currency is an integral part of every facet of the country’s daily economic enterprises – private, business, and public sectors, alike.

A recent released study showed that 53% of financial support to Israeli charities came from abroad. Thus, making foreign exchange exchange fees, rates, and processing times of the utmost importance to Israeli charities.

(N.B. While this post is most relevant for charities operating in Israel, its underlying principles are true regardless of location.)

WHY USE A MONEY CHANGER?

Cost

When using traditional financial institutions to process foreign currency, fees tend to be higher. This impression holds both for foreign currency transfers (wires) and checks — this is of course, assuming that many individuals and charities aren’t using banks that specialize in foreign currency (i.e. bankers unlike me).

The belief — and not necessarily correct — is that money changers offer better exchange rates, as well. Again, this is not always the case (see previous parentheses).

Speed

Turnaround is always an important factor when receiving money from abroad. One, because of exposure to currency fluctuation. Two, because of cash flow.

While money changers may have a shorter turnaround than banks vis-a-vis transfers, they definitely have a shorter turnaround than banks vis-a-vis foreign currency checks. (Though, everything comes at a price.)

Wow, seems pretty good. Why in the world shouldn’t a nonprofit organization use a money changer!?

After all, doesn’t the charity have an obligation to its constituents to make sure that the money it raises arrives at its destination as quickly and as cheaply as possible?

NO.

The mission of the charity is to show its donors and relevant governmental agencies transparency, control, and accountability for ever cent, agurah, peso, and shilling raised.

With respect to this charge, money changers are a danger to proper book keeping and the transparency everyone is demanding:

1. Lack of Control and Transparency

Whenever an organization uses a money changer it is voluntarily relinquishing control and permitting a third party to handle its money. While receipts can be issued and paper-trails followed, a small but unavoidable black hole is created.

Instead of having a bank statement that clearly shows where the donation originated from, the bank page will simply show an generic “incoming wire” (from the money changer) or even worse, an ambiguous “cash deposit.”

True Story: I have seen nonprofits arrive at a bank to deposit tens of thousands of shekel IN CASH. Now is this really the kind of impression an organization wants to make to its bank, donor or oversight body? Somehow, a wad of bills in a paper bag just doesn’t scream “trust me.”

2. Blurred Beneficiaries

When money is given to a money changer, the intended recipient is not the one either directly receiving the money nor cashing the check.

This is especially problematic with foreign currency checks, where the intended beneficiary never even deposits the check into the bank — an issue that effects the donor perhaps even more than the charity.

True story: Charities have no way of knowing where its money changer might redeem its check. Some money changers use Arab Banks to clear their checks. Putting politics aside, donors (and sometimes even the IRS) get mighty curious when a check earmarked for an Israeli cause has either “Bank of Cairo” or “Bank of Jordan” stamped on the back.

3. Cost is Now a Secondary Concern

In a previous post I quoted documentation that specifically mentions that cost is an irrelevant factor when the IRS examines a charity for effectiveness:

The Treasury Department is standing by its suggestions, thus, signaling to all that “life is simply more expensive and inconvenient as a result of global terrorism, and everyone is expected to bear a share of the new costs of doing business.”

And the IRS isn’t the only one using similar logic.

AND SPEAKING OF COST…

Did I mention that money changers might not even be cheaper than banks? If you’re looking for proof, contact me. I’ll make you a believer.

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professional. Read the full disclaimer.

A recent New York Times’ article attacked American charities that help build communities in  Israel’s West Bank and IRS policy that enables donations to these organizations to be tax-deductable.  As with any piece about the Palestinian-Israeli conflict, many people have been quick to attack or defend the veracity of the article.

To nonprofit organizations, the value of the article is not the accuracy of the authors’ claims, but rather the article’s insight into current concerns and trends influencing the nonprofit sector.  These can serve as warnings and guidelines to US charities that operate internationally.

Towards this end, I have highlighted themes in the article through blocks of text.

Charity Law as an Extension of US Policy

Using tax-exempt donations to help Jews establish permanence in the Israeli-occupied territories – effectively obstructing the creation of a Palestinian State.

Mr. Obama has particularly focused on them as obstacles of peace.

As the American government seeks to end the four-decade Jewish settlement enterprise…the American Treasury helps sustain the settlements through tax breaks on donations to support them.

Washington has consistently refused to allows Israel to spend American government aid in the settlements.

The article hints to a link between United States charity regulation and governmental policy.   While there necessarily shouldn’t be a connection between the two, the facts on the ground seem to hint otherwise.  More because of increased scrutiny by the governmental department tasked with overseeing nonprofits rather than because of changes in law.

It would behoove organizations operating overseas to consider this growing link (at least during President Obama’s tenure) and to consider US policy when formulating strategy and governance.

Board Members and Officers Should Not Be A Rubber Stamp

It [Shuva Israel, a US tax-exempt charity] has two volunteers who double as board members. “I’ve never been to the board,” said one of them, Jeff Luftig.

Independence and control: two running themes in nonprofit legislation, regulation, and audits.

Volunteers who agree to serve as a board member should understand that this voluntary service comes with mandatory responsibilities. The same holds true for a nonprofit searching for potential candidates.  The United States Government and the public look to a Board of Directors as the brains and power behind a charity; as such, the board is expected to actively participate in the running and planning of a nonprofit.

Local Charity, Local Board

Although IRS rules require that American charities exhibit “full control of the donated funds and discretion as to their use,” Shuva Israel [a US tax-exempt charity] appears to be dominated by Israeli settlers.

The IRS does not want an American charity to be a puppet, subservient to the wishes of another organization or individual — local or foreign.  While foreigners are allowed to sit on the boards of American charities, the nonprofit should never appear as if it has lost its American identity and independence.

Silence Speaks Volumes

Settlements violate international law…

In some ways, American tax law is more lenient than Israel’s.

Asked whether it had ever filed a tax return, he responded, “I’m not in a position to answer that.”

Records from the group [Manhigut Yehudit] say a portion of the $5.2 million collected has gone to Israeli “community facilities”…neither man would answer questions about the nature of the “community facilities.”

Silence can sometimes be the worst answer an organization can give as it hints that perhaps no employee knows the answer or, even worse, that the organization has never bothered to ask the question.  Conferencing with lawyers, accountants, and other professionals can often turn up most of the potential challenges facing the charity. It is to the benefit of the organization to prepare responses to expected Frequently Asked Questions and designate  employees and volunteers best equipped to answer them.

The organization’s reputation demands an answer better than silence.

Filing with the IRS: The Best Defense is a Good Offense

Religious charities are still more opaque; the tax code does not require them to disclose their finances publicly.

Religious groups have no obligation to divulge their finances, meaning that settlements may be receiving sums that cannot be traced.

Religious organizations – like many of the charities that support Israel – that expect to come under government or general scrutiny should consider filing relevant IRS paperwork even though they are not required. Entering background, managerial, and financial information information ahead of any “investigative piece,” is convincing evidence that the nonprofit’s intentions are noble, as well as legal.

Conclusion

As the United States Government loses millions of dollars from noncollectable donations to tax-exempt organizations, charities will always be subject to public and governmental scrutiny.

After reading the excerpts from the Times article, one can certainly understand more of the public and regulatory sentiment towards US registered charities operating abroad, especially those supporting Israel. This said, American nonprofits can still fulfill their mission, operating at their peek capacity.

Among the many DON’Ts mentioned by the authors were also some excellent DOs, which, if followed, can prevent the very accusations highlighted in the article:

The [US] tax code encourages citizens to support nonprofit groups that may diverge from official policy, as long as their missions are educational, religious or charitable.

The Time’s review of pro-settler groups suggests that most generally lie within the rules o the American tax code. Some, though, risk violating them by: (1) by using the money for political campaigning and residential property purchases, (2) by failing to file tax returns, (3) by setting up boards of trustees in name only and (4) by improperly funneling donations directly to foreign organizations.

But the IRS does allow deductions for donations to American nonprofits that support charitable projects abroad, provided the nonprofit is not simply a funnel to another group overseas.

Truly, good advice to follow.

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Israeli charities (amutot in Hebrew) rely on donations from overseas – no secret there.  Many foreign-based charities choose to create an American based nonprofit, more commonly referred to as a “Friends of” organization so donations can be tax-deductible vis-a-vis the American Federal Government. (In a previous post, I spoke about IRS trends when a “Friends of Organization” is applying for tax-exempt status.)

However, it could be that establishing a “Friends of” organization is not in your charity’s best interest. The following are some considerations that elaborate on:

Why not to establish a U.S. registered “Friends of” Organization to help fundraise?

1. Fees and Costs

Setup Costs: Experts estimate the fees associated with opening and registering a nonprofit organization in the United States at $5,000. With a complicated request, this number could increase. The organization has to answer to itself and to its donors if this cost is worth it. (More on startup fees can be found on the Social Citizen, “Want to Start a Nonprofit — Think Again.”)

Ongoing Administrative Costs: An American charity requires a presence in America. The government and private donors will expect a local address to handle their needs. Office space, supplies, travel, and salary are just a few of the ongoing expenses that can be expected for an American-based charity to support its ongoing costs.

2. Double the Regulatory Headache

On both sides of the ocean, international charity has become more complex in the last decade. A nonprofit that wishes to operate in two countries must, therefore, also adhere to two separate sets of relevant regulations, on issues ranging from philanthropy, tax, and law (too name but a few). Operating in accordance with one country’s regulations can be trying, let alone two countries (which by the way, can sometimes contradict one another). This is not to say that it is impossible. But an organization needs to understand from the outset that additional paperwork, manpower, and money might be required to ensure that both organizations are operating as they should.

3. Independence

Charities that want to register abroad (in this case the United States) need to understand and appreciate that for all intents and purposes, they are creating a new, separate entity there. The attempt by an Israeli institution to control, force, or participate in the American “Friends of” organization is not looked upon favorably by the I.R.S. (to put it mildly). The US government has hinted – and sometimes stated outright – that no charity shall be subservient to the control of another party; including but not limited to, donors, foundations, and other charities (local or abroad).  (For more, see my article on international charity.)

An Israeli charity might not by ready or willing to relinquish control over its fundraising efforts and branding to a separate entity – even one committed to helping raise funds. One only needs to examine the recent cases of American Friends of Magen David Adom and others to understand the potential clashes that can occur.

4. No Monopoly on Raising Money

Nowadays it is possible to issue US tax-deductible receipts to donors without actually being registered in America, namely through a Middleman Organization. Also known as Conduit Organizations, these charities’ by-laws allow them to give financial support to other worthy charities that forward similar goals. While the PEF is the most famous, many other 501(c)3 tax-exempt organizations offer similar services. Recently, some online donation portals have also joined the ranks. This is even assuming that all donors want a tax-deductible receipt, which not all donors do.

What should my organization do? Register as “Friends of” or not bother?

Only the organization – through its staff and board – can know the answer to this question; it shouldn’t hire a consulting firm or be pushed around by a big donor. Like everything else, it is about strategy and purpose.

However, there are some universal factors. The following are some considerations that might influence a decision:

Cost – It takes a buck to make a buck. Do the setup and ongoing expenses outweigh the benefits?

Volunteers – Does the organization have supporters living in the States that are willing (or unwilling) to take on the responsibilities for running a nonprofit?

Board Members – The IRS, among others, has frowned upon overlapping board members between American organizations and the foreign charities they support (see same post on international charity mentioned above). Does the organization have the fresh faces to help found an independent American charity?

Ongoing Fundraising Efforts – Will the organization be engaged in ongoing fundraising efforts in the United States throughout the year or just infrequent fundraising campaigns?

Donor Relations – One of the main reasons for creating a “Friends of” organization is to communicate, recruit, and retain donors. Can the organization accomplish these goals from Israel? (Remember that for the same job, an Israeli’s salaried employee will cost less than an American’s salary.) Will an American living in America but employed by the Israeli charity suffice?

Control – Never forget that an American charity (whether its actual called a “Friends of” or not) must be independent. Is the foreign-based charity willing and able to give up control to a group of supporters and like-minded individuals? (And yes, this consideration is so important that I mentioned it twice.)

Conclusion

I want to stress that I am not advocating one over the other – there is no objectively better option. However, I will say this: the instinctive, gut-reaction for an Israeli charity to automatically setup a “Friends of” organization, regardless of whether or not it fits into the strategy of the organization is, in my opinion, premature and incorrect. Simply put, money and time might be better spent elsewhere.

What’s your experience? Why not share a story that might help another organization out…

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

International organizations have been highly successful in raising funds from the United States through U.S. based charities commonly referred to as “Friends of” organizations. These charities are registered in the States and have 501(c)3 tax-exempt status, allowing donations to these essentially foreign organizations to be tax-deductible.

As you can imagine, many charities registered outside of the United States consider an “American Friends of” organization as a vital part of their fundraising strategy.

Jewish causes, especially those based in Israel, are no exception to this rule. A recent report compiled by Dr. Nissan Limor estimated that foreign donations to Israeli charities from sources outside of Israel stood at 2.165 billion dollars in 2007, with much of that coming from the United States (although, he didn’t stipulate how much). There are about 1,000 new Israeli charities [amutot] created every year and it would hold that many of these organizations will seek to create an “American Friends of” supporting charity.

Hence, recent conversations I have had are causing me to worry.

The Reduction of 501(c)3 Exemptions Granted

In late July, I wrote about the scandal that rocked the Jewish community of Brooklyn and Deal, culminating in the arrest of three mayors, five respected community rabbis, and a score of government officials. Specifically, my third post on the scandal described the The IRS Expected Response.

In that post, one prediction I made was the “Reduction of 501(c)3 Exemptions Granted”

The easiest way to prevent future international fraud is to restrict the organizations that can gain tax-exempt status…The U.S. Department of Treasury has only enough manpower to audit between 2 – 3% of registered charities in America. Scrutiny of organizations that already have 501(c)3, then, seems almost like an impossibility. However, as every new organization that wants tax exempt status needs approval from the IRS, it would be a relatively simple procedure to restrict approval to new charities; more specifically, to new charities that donate to international causes.

Well, unfortunately, this seems to becoming a reality. Three recent conversations are shedding light on what seems to be new practices by the IRS. (Specific names are being withheld as applications and relationships are still ongoing.)

The Name “American Friends of” Bothers the IRS

On a recent trip to the States, I had the fortune to sit with a prominent lawyer that represents many Jewish nonprofits. He informed me that he submitted a file for 501(c)3 approval for the “The American Friends of _______,” an organization that would like to raise funds for a charity operating outside of America (but not in Israel). The application is taking an inordinate amount of time, mostly due to the staggering number of questions the lawyer has received from the IRS representative assigned to his file. His application folder measures an astounding 2.5 inches! Having been submitting similar applications for decades, the lawyer is quite surprised at the level of scrutiny and feels that it is the organization’s name that is evoking this reaction. The lawyer is losing patience and if nothing changes, will close the application and resubmit under a different name, hoping this will solve the problem.

Charities Should be Supporting a Mission, Not Supporting an Organization

The following day I met with a well known nonprofit consultant that works with both Jewish and non-Jewish charities. He informed me that it has come to his attention that the IRS will no longer approve 501(c)3 status for organizations that are founded simply to support one specific institution. In other words, when applying for exemption, the papers should list the mission or objective that the charity supports, not what organization it supports. It was implied, however, that in practice, a 501(c)3 charity can transfer money to (i.e. support) a single foreign organization without fear of losing its tax-exempt status — the American nonprofit, though, must be able to prove its independence. (More analysis, tips and background on international charity emanating from America can be found on an article I wrote: “International Charity in the Face of Global Terrorism.”)

Don’t Go Against American Policy

And finally, upon returning to Israel, I was speaking to a director of a Israeli nonprofit who told me of a colleague of his whose American charity had applied for 501(c)3 tax-exempt status.  At the time, the applicant informed this director that in his application he stated that the mission was to support Judea/Sumaria/Gaza. The applicant assured the director that the approval was imminent. A half a year later, his approval had yet to come and this applicant soon gave up.

The Obama administration is not in favor of what it calls the “Territories.” Leaving politics aside, we are seeing organizations whose mission clashes with American policy and/or opinion having trouble obtaining 501(c)3 tax-exempt status.

Conclusion

In closing, I would like to stress that whether these trends are good or bad is not the issue. The important point is that Israeli nonprofits and their American supporting counterparts should take notice and act accordingly.

These conversations stress:

1. New organizations that have the words “American Friends of” in their name will have trouble getting their 501(c)3 tax-exempt status approved.
2. By-laws of organization should list the cause that the organization is supporting, and should not specify particular organizations.
3. When applying for tax-exempt status from the American government, it might be best to “tow the party line.”

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Loans can be a vital, strategic tool for a charity. At the most basic level, donations do not always arrive before the expenses they are needed to cover. At such times, credit – in the form of a bridge loan, for example – might be the perfect tool to allow a nonprofit to survive until the particular donation or grant is received.

The simplest way to lend money to a charity is for a donor to just give the organization the needed funds – either through cash, check, or wire transfer – with the (often unwritten) understanding that the funds will be returned at an agreed upon time. As no financial institution is involved, this type of loan is given in a relatively shorter amount of time, less complicated (no/less forms), and cheaper (no/lower interest rate and associated fees).

Nevertheless, an organization or donor might not want to procure a loan this way but rather through a registered financial institution; such as a bank, credit card company, or insurance company.

When suggesting this to a director of a nonprofit, he couldn’t understand why both parties wouldn’t choose to execute the loan in the least-bureaucratic and most inexpensive option and not through a registered financial institution.

To answer this question succinctly, the nonprofit sector has gotten increasingly complex in the last ten years or so. Methods that are the quickest and/or cheapest do not always satisfy the requirements of today’s private individuals, public institutions, and governmental bodies.

Below are some additional considerations that might convince the donor and/or the nonprofit organizations to forgo the easy way of a non-registered loan in favor of recorded and issued loans at a financial institution.

From the Donor’s Perspective

1. Lack of a Clear Agreement – Often these casual loans are unwritten agreements. Even with those that are, amounts and dates tend to be blurred, confused, or simply ignored.
2. Taking Money from a Charity — No one likes to take money back from a charity. It goes against our DNA – the donors are supposed to be giving the money, not getting the money. If the organization doesn’t return the money as agreed (even if not intentional), it is just darn-right awkward for a donor to chase his favorite charity to get money back from them.
3. He Said, She Said – Because of the unofficial nature of these loans, they can, if not handled properly, turn into a gigantic mess (pardon my French). Even with written contracts it can sometimes degenerate into a game of “He said, She Said” that pits both parties against one another.
4. Temporary Becomes Permanent – Fear that the temporary gift might decide to stay a little bit longer – once a loan, now a donation. There is a feeling that once money is in the hands of a charity, it will very likely remain there forever (and let’s be honest, its not that crazy of a leap).

From the Charity’s Perspective

1. Transparency – Need I say it: transparency is essential for nonprofits. Everyone at every level of the nonprofit equation is checking to make sure that a charity has it. The “unofficial” loan rarely is hard to find in a charity’s books, if it appears at all. It’s a general rule, if the loan isn’t apparent or easy to find, the organization is lacking transparency.
2. If it Feels Like a Duck and Quacks like a Duck – it’s a Duck – Experience has shown me that organizations have a harder time treating the loan as temporary (either because of forgetfulness or premeditated ignoring) when the money is simply given outright, sitting in the organization’s account. Simply put, if it looks, feels, and smells like a donation then it will be treated like a donation – which, of course, it isn’t.

Conclusion

While the blog was inspired by a conversation I had with a nonprofit CEO, the above points are the product of years of personal observations and analysis, as well as conversations with other nonprofit-support professionals.

I would like to leave on this note: It is not WHAT the nonprofit does that arouses suspicion, mistrust, or confusion but rather HOW the charity does it.

Take a loan, borrow money, apply for a line of credit – whatever you do, just do it in a way that will inspire trust and responsibility. Doing this will satisfy all parties and encourage future financial support.

Tizku Lemitzvot,

Shuey

Things to add? Errors to correct? I look forward to hearing both (although, to be honest, I prefer the former rather than the latter).

This post is intended for informational purposes only. Please read my full disclaimer.

In the past I have written about the US dollars tough battle against a downward spiral. In short, the UnitedState’s dollar is fighting an increasingly gargantuan federal deficit and the prospect of continued low interest rates neither of which bode well for the strength of the dollar.

With that said, what happened last week that caused the dollar to soar against the shekel? Friday, October 23rd, saw the dollar close at 3.6972 while a week later on Friday, October 30th, the dollar closed at 3.7545 a jump of 1.5% in only seven days!

One, the Bank of Israel announced that it was not going to increase interest rates for November. Without going into detail and speaking only in broad terms, lower interest rates make a currency less desirable.

Two, reports that the United States economy grew for the first time in over a year. Helping this was another report that found that factory activity in the mid-US had also expanded. These reports help paint a picture that America could be on the road to reducing its debt and on the way to full economic recovery.

Three, and this might be the most important point, the market has been volatile this year (generally, for the good of everyone) and the end of the year is approaching. A financial advisor in Israel explained to me a current phenomenon: this past year has seen investors using the US dollar as a proxy for taking or reducing risk. In other words, when investors want risk, they sell dollars and when they want security they buy in dollars (investing in treasury bills and the like). The increase in dollar-based investment leads to an increase in demand and a shortening of supply hence the US dollar rises. More specifically, people are looking to hold on to whatever profits they have made this year and are buying dollars to secure these investments.

Please note: While this last item could affect the dollar for the next two months, this is in no way a prediction of the future. I have merely commented on the past. For an accurate read on what will/might happen, please visit your locally licensed financial advisor (i.e. not me).

Special thanks to the following periodicals that help me be an educated consumer:

New York Times Global Edition – Business

Globes: Israel’s Business Arena

Daily Forex

Forex Capital Markets

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey