CA Wildfire Disaster Relief: A Guide for Nonprofits

Supporting communities and rebuilding lives

Wildfires have become a devastating reality for California, leaving behind a trail of destruction that affects countless lives and communities. In light of these increasingly frequent and severe incidents, disaster relief efforts have become more critical than ever.

Nonprofit organizations play a vital role in providing support and resources to those impacted by wildfires. This blog aims to serve as a guide for nonprofits involved in or looking to get involved in California wildfire disaster relief.

Activities outside of the core mission

Impact of campaigns not aligned with mission on tax-exempt status

In a disaster relief situation, an existing recognized charity that is not specifically organized to provide disaster relief — or similar activities were not specified in its application for exemption — may engage in disaster relief activities without obtaining prior permission from the IRS.

Traditionally, nonprofits operating under the 501(c)(3) designation must stay within the bounds of their tax-exempt purpose. Working outside the bounds of an organization’s mission and approved programs can cause unrelated business income and, in some cases, even the loss of tax-exemption.

If an existing charity chooses to get involved with disaster relief, it must report this new activity on its annual return and may wish to report a change in its activities to the IRS Exempt Organizations office.

Charitable contributions

While nonprofits may fundraise for disaster relief, traditional rules apply for targeting the use and distribution of disaster relief aid. Under federal law, an existing qualified charity generally must be given full control and authority over the use of donated funds, and contributors may not earmark funds for the benefit of a particular individual or family. Contributions to qualified charities may, however, be earmarked for the CA wildfire relief.

For example, a nonprofit may start a disaster relief fund to support its client base impacted by the fires. But a donor cannot earmark that its contribution to the fund is to support a particular person or family.

The issue — should a donor wish to pursue this — is that the donation may be deemed as a gift to the individual(s) rather than as a charitable contribution, thus losing the donor’s tax benefit from the gift.

Form 990 reporting

A disaster relief program may be considered a new program of the organization, which would be disclosed on its Form 990. If the nonprofit makes any disaster relief payments, these would be reportable as part of Schedule I, Part I, Line 1 — which asks if the organization maintains records to document:

• Amount of the grants
• Grantees’ eligibility for the grants
• Selection criteria used to award the grants

State-specific regulations

California has unique state laws regulating charitable activities. Nonprofits must comply with the California Attorney General’s requirements for charitable organizations, including registration and annual reporting.

California annual reporting due dates have been extended until the federal return has been filed. At this time, the IRS has extended the filing due dates for those counties in the affected areas.

Audit requirements for California nonprofits

With the increased giving and efforts in the area, it is important to remember in California, nonprofits are subject to specific audit requirements based on their gross revenue and assets. According to the California Nonprofit Integrity Act, a nonprofit organization with gross revenue of $2 million must have its financial statements audited by an independent CPA in accordance with general accepted accounting principles. For some nonprofits, they may not typically require an audit, but due to increased disaster relief funding, an audit requirement may be triggered for one to two fiscal years.

Tax implications of relief distribution to employees

When a nonprofit organization provides special relief distribution to its employees, these benefits are typically considered taxable income to the employees. The IRS generally treats any form of compensation, including relief distribution, as taxable wages unless specific exceptions apply.

Because President Biden has issued a disaster declaration for the areas hit by the wildfires, under IRC Section 139 qualified disaster relief payments from any source, including employers, reimbursing or paying individuals’ specified expenses in connection with the fires is not taxable income to the individual and is not subject to employment taxes or withholding.

Qualified disaster relief payments within the meaning of Section 139 include payments received (regardless of the source) for the following expenses:

• Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster
• Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a qualified disaster (a personal residence can be a rented residence or one you own)
• Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a qualified declared disaster

Qualified disaster relief payments do not include:

• Payments for expenses otherwise paid for by insurance or other reimbursements
• Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation

Employer-sponsored charities

Employer-sponsored charities sometimes establish emergency hardship funds to help employees who have been the victims of crime or a personal loss such as a fire. Not all employer-sponsored charitable organizations are permitted to provide assistance to employees and their families in any type of emergency hardship situations.

The types of benefits a charitable organization can provide through an employer-sponsored assistance program depend on whether the employer-sponsored organization is a public charity, a donor advised fund, or a private foundation. When an employer-sponsored organization provides assistance to employees, certain limitations apply to help prevent such aid from resulting in impermissible private benefit to the employer, including executive management.

Grants management

Many nonprofits rely on grants for funding. When applying for or using grants for disaster relief, it’s essential to adhere to the stipulations of each grant, which often include detailed reporting and accountability requirements. Mismanagement of grants can lead to financial and reputational damage.

Pass-through grants and grant income are both types of funding received by nonprofits, but they have distinct differences:

• Pass-through grants — These are funds that a nonprofit receives with the intention of transferring them to another entity, often a subgrantee or a project partner. The nonprofit acts as an intermediary and does not retain these funds as revenue.
• Grant income — This refers to funds received directly by the nonprofit to support its own programs and operations. These funds are considered revenue for the nonprofit and are used to further its exempt purposes.

Understanding these distinctions is important for proper financial reporting and compliance with funding requirements, as nonprofits typically recognize pass-through grants as a liability on their financial statements, whereas grant income is considered revenue.

Regardless of the type of grant, it is important that the organization keep detailed records of the funds and how they are spent.

Government and nonprofit collaboration

Working alongside government agencies and other nonprofits can enhance the effectiveness of disaster relief efforts. Establishing partnerships allows for resource sharing, coordinated response, and leveraging each organization’s strengths. While getting aid distributed quickly is important, it is also important to formalize these collaborations with clear agreements outlining roles and responsibilities.

How CLA can help

Nonprofits play an indispensable role in responding to California wildfire disasters. However, thorough preparation and understanding of the financial and tax implications are crucial for sustainable and effective relief efforts.

CLA’s industry professionals can help your nonprofit navigate the complexities of disaster response while maintaining compliance and supporting long-term viability.