Opening charity foundation and donating dental equipment to the charity that the charity can leaseback to the dental office

Hello! My name is Dolan and I am happy to help!

Do you already have the charity established as a 501(c)(3)?

Also, it’s important to know the purpose of the charity. What’s the charitable purpose?

Ok! Did you need to tell me anything else? If not, I can start with answering your question.

Ok! I just need a little time to draft up a high-quality answer. I'll be with you as soon as possible. It won't be terribly long.

Ok so here is what you need to do generally: 1. So if you haven't already you need to do things like select a name, define its purpose (e.g., supporting community dental care), and file the necessary paperwork with your state and the IRS to obtain 501(c)(3) tax-exempt status. You can click here to actually file - https://www.irs.gov/charities-non-profits/how-to-apply-for-501c3-status#:~:text=To%20apply%20for%20recognition%20by,the%20shorter%20Form%201023%2DEZ. 2. Then, once your nonprofit is established, you can start the donation process. Transfer the ownership of your dental equipment to the nonprofit. Be sure to document the fair market value of the equipment at the time of the transfer for tax purposes. By document, I mean do it in writing. The FMV doesn't have to be based on anything other than your best, most reasonable, and most accurate estimate of what the equipment is worth; 3. Then, after the equipment is transferred to the nonprofit, you can create a leaseback agreement between the nonprofit and the dental office. This agreement should specify the terms, such as the duration of the lease, the rental rate, and any conditions for using the equipment. Since the nonprofit will need to charge a reasonable leasing fee to comply with nonprofit regulations, you’ll want to make sure this is in line with market standards.. We can draft lease agreements for you and given that you are a member of this site, you get a 10% discount. The usual fee is around $*** (not including the 10%) to draft things like this. 4. I also recommend creating a board of directors, preferably those who are not related by blood to help runt he non-profit organization. 5. When it come to taxes, you typically can write off the fair market value of any donations from your regular practice so long as the 501(c)(3) paperwork has been completed and approved by the IRS. Does that help clarify things? I want to make sure I didn’t leave anything out.

Hello there! Let me answer your questions: 1. Your original for-profit business (I assume that is what you mean by "***") does not have to be a part of the business at all. The non-profit should be a separate entity, even if it's controlled by you or others. This way, any donations to the non profit organization will be above board; 2. Since the non-profit will be separate, yes, the non profit can definitely use salaries and expenses as deductible expenses. These things are ordinary and necessary expenses for the business so that's fine. The board members/executive members can be paid; 3. You could create a trust to manage it, but it's certainly not required that you do so. If you do so, you should consider an irrevocable trust as it would make only the trust liable for any actions against the non-profit organization; 4. To your concern about the specifics of structure sales of the office and allocations of everything, yes, what you are considering is just fine;

To your other question, a few things: 1. If your software business is set up as a sole proprietorship or LLC, consider whether transitioning to an S-Corp or C-Corp might be beneficial. An S-Corp allows you to pay yourself a reasonable salary and take additional income as distributions, which are often taxed at a lower rate. A C-Corp could offer the ability to reinvest profits into the business at the corporate tax rate, which may be lower than your personal income tax rate. 2. Create a loan agreement between you and the business. A such, instead of simply funneling personal money into the business as contributions, structure these payments as loans. Draft a formal promissory note with clear terms for repayment and a reasonable interest rate. This way, when the business becomes profitable, it can repay you, including interest, which won’t be subject to payroll taxes.. 3. If your business purchases software, equipment, or other tangible assets, take advantage of the Section 179 deduction and accelerated depreciation to lower your taxable income. (For this, I'd talk to an accountant). 4. Finally, take a close look at operating costs and see where you can trim unnecessary expenses. Sometimes, a leaner operation can help bridge the gap until revenue grows!

So to your first question, your understanding is mostly correct, but let me provide some clarification for accuracy. In a private nonprofit foundation structurm, the foundation can use its income to pay reasonable salaries to its members or staff for services rendered. However, the compensation must not be excessive, as this could jeopardize the foundation's nonprofit status. The foundation's remaining income is generally not taxable, provided it complies with IRS rules and regulations governing private foundations, such as avoiding self-dealing, meeting reporting requirements, and not engaging in prohibited activities. You're correct in that private foundations are required to distribute at least 5% of their net investment assets annually for charitable purposes. This is not necessarily tied to the "remaining income" but to the total value of the foundation's investment assets. The 5% can include grants, donations, and some administrative expenses related to its charitable purposes. If this aligns with your intent, then yes, your structure is correct.

Great question! When it comes to private foundations and the 5% distribution requirement, it’s not about the value of the buildings themselves. The requirement is tied to the foundation’s net investment assets, which typically include things like stocks, bonds, and other investments that produce income. Real estate, like the buildings held by ***, would only be factored into the calculation if it’s considered an investment asset and not used directly for the foundation’s charitable activities. In your case, if *** is generating rental income and that income flows into the foundation, it’s the rental income that would count as part of the foundation’s financial activity, not the $3 million value of the buildings. The 5% minimum donation requirement is based on the TOTAL value of the foundation’s NON-charitable-use assets, which usually includes cash, securities, and investment properties. So, unless the buildings themselves are being treated purely as investments, their value wouldn’t directly require the foundation to donate 5% of that $3 million annually. Instead, you’d be looking at the rental income generated by *** and any other monetary assets the foundation holds. To simplify, you’re more likely to be dealing with the income produced by the properties and other financial assets of the foundation rather than the full market value of the buildings themselves.

Sure! if most of the nonprofit activities are going to be done in CA, my recommendation is to form a foundation based in California. I'm a CA attorney so if you want we can set up something through this site. My regular fee is just $400 an hour and the billing takes place every two weeks. The site pretty much handles everything for us. Nevertheless, for the equipment sale, the foundation can hold and sell it, but profits must go toward its charitable mission. Using proceeds to pay ***’s loan could be tricky since nonprofits can’t benefit private companies or owners. Leasing the equipment instead of selling might be a safer move.

You’re absolutely right that using ***’s income to pay off its loan could work if *** is held within the foundation and all the income it generates flows directly into the foundation. By reducing the debt, the foundation would save on interest payments, which ultimately frees up more money for its charitable purposes. The key is ensuring that this setup complies with IRS rules and doesn’t create a scenario where private interests (like *** or its owners) are seen as benefiting improperly. Since *** would essentially be an asset of the foundation, using its income to manage debt tied to the foundation’s operations could be justified, as long as everything stays within the nonprofit's framework. As for leasing versus selling the equipment, renting makes more sense. This allows the foundation to generate some rental income in the short term while keeping the equipment as an asset. Once the practice is sold, though, and the equipment is sold off, the proceeds from that sale would indeed become liquid cash within the foundation. At that point, it would be subject to the 5% annual distribution requirement. That’s something to keep in mind when structuring the sale to ensure the foundation’s obligations are met while still maximizing its benefit.

Sure thing! I practice throughout Southern California and I'm based in San Diego.

Also, yes, please make sure to hire a CPA as well. You don't want to risk this. My name is Dolan Williams and I just work out of my home office (keeps overhead low). To your other question, you don't need tow separate non-profits. You can have one non-profit, you can organize it in California (so long as you have some presence here, even just with a UPS store box).

For sure!

That works. You can have that as your address or even a USPS or UPS store box. It's just fine no matter what.

The foundation (whether you form it as a non-profit organization or just as a charitable trust) is based in CA it can hold *** as part of the business. The thing is if *** does business in OR, it should maintain its LLC status there to stay compliant with the local laws regarding registering the business there.

Correct, for the CA foundation, you'd file everything here. You do not have to change anything with ***. The state of OR doesn't require you to update the state unless you change the name or the type of business (which is not the case here). You do not have to change *** from a for-profit LLC at all. That stays the same. You still have to file income taxes as normal. The thing is if a foundation owns the LLC, then that taxable income flows through to the foundation since LLCs are "pass through" entities for tax purposes in this case.

Hi *******, let me address your messages one by one: 1. As far as your map, it's a good start, but I put in a list of documents that you would need. 2. To your question about form 1023, unless the IRS prohibits me from doing so (I do not believe this is the case), yes, I can. I've attached a document to address your 1st and 3rd emails to give you a sense of what's needed up to now.

To your 2nd question, what you have is accurate. You basically have to take 1.5% of the assets value, then subtract that from the asset's value to get a total of $3,349,000, then you multiply that by 5% to get $167,450. Thus, on paper, that's what would have to be distributed.

When it comes to UBIT, the rules can get a bit tricky. Generally, rental income isn’t subject to UBIT, but there are a few things to consider; 1. You are right in that a major exception is when the property was purchased with borrowed money, like a mortgage. In that case, the IRS MIGHT consider the income from that property to be subject to UBIT because it’s classified as “debt-financed property.” If the property is primarily used for the nonprofit’s charitable mission and not for generating income, UBIT generally doesn’t apply. For this, a tax advisor would have to give you more specifics. 2. Another situation where UBIT can come into play is when the foundation gets involved in active business services tied to the rental arrangement (you mentioned security and catering which would count as a service). However, I do not see that being the case here. 3. If the commercial property is used for commercial purposes. Because you're renting this out to ***, I do have a concern the IRS would consider this to be taxable since it's not for a charitable purpose. So rental income is usually safe from UBIT, but if it's debt financed and if you're charging *** for the rent, that amount may be taxable.