Some of the more common questions I get from the nonprofit leaders who I serve concern the Arizona Tax Credit for Contributions to Qualifying Charitable Organizations (QCOs). This tax credit is provided for in Arizona statutes ARS sec. 43-1088 et. seq.
There are separate and somewhat similar Arizona tax credits for gifts to Qualified Foster Care Organizations (QFCOs), School Tuition Organizations (STOs) and Public Schools. Although QFCOs, STOs and Public Schools are not the subject of this article, it is important for development professionals working in all of these organizations to know that the deadlines for gifts to take advantage of these Arizona Tax Credits have not been extended and they remain April 15.
WHAT IS THE QCO TAX CREDIT?
This is a tax credit for donations to QCOs in the State of Arizona, which gives the donor a dollar-for-dollar reduction in the amount of taxes owed, essentially a form of self-direction of the donor’s taxes. This is much better than an itemized deduction, in which the donor only receives a reduction in taxes at their effective tax rate. In other words, using this tax credit, the donor can elect to give money to a QCO rather than pay an equivalent amount of taxes to the State. If paid in taxes, that same money would in essence disappear into a black hole rather than tangibly and visibly affect someone’s life through the impact of QCO programs.
The amount of the credit is $400 for single and head of household donors, and $800 for married donors (if the donors give more, they are allowed to carry over the excess for use in the future year). So, most donors elect to give the maximum amount of the tax credit. Individually this isn’t much to most organizations’ budgets, but the combined total of all of these donations can be very significant.
The donor may give to a QCO to take advantage of the credit any time during the tax year, or they may make the donation after the end of the tax year until April 15 of the following year. If the taxpayer donates after December 31 but on or before April 15, they can use the tax credit either in the same year as their donation, or in the prior year – as long as the organization is approved as a QCO for the same year in which the taxpayer takes the credit. Most donors choose to give annually and take the tax credit in the prior year.
DEADLINE FOR MAKING THE QCO DONATION
Normally, April 15 is the deadline for filing Federal and State personal income taxes. However, due to the coronavirus pandemic, in 2020 these filing and payment deadlines have been extended until July 15. Although many development staff of QCOs may be assuming that the deadline for QCO tax credit donations has also been extended, it has not. The deadline for the QCO (and QFCO, STO and Public Schools) tax credit remains April 15, 2020!
As an aside, there is also a common misconception among some QCO development staff about whether donors may also claim their QCO credit donation as an itemized charitable deduction on their Federal tax return. If donors were allowed to do this, the donor would actually make money by giving to a QCO because not only would they get a dollar-for-dollar offset on their Arizona taxes, but they would also receive a reduction of their Federal taxes. The Arizona legislature anticipated this, and expressly prohibits claiming the amount given to a QCO as both an Arizona tax credit and an itemized deduction. It can be one or the other, but not both. The donor will be better off claiming the QCO tax credit rather than an itemized deduction, since as mentioned previously, the tax credit is a dollar-for-dollar offset against taxes, whereas itemized charitable deductions have limitations beyond the scope of this article.
WHICH ORGANIZATIONS ARE QCOs & HOW DOES AN ORGANIZATION QUALIFY?
A list of all QCOs in Arizona can be found online at the Department of Revenue website at https://azdor.gov/tax-credits/contributions-qcos-and-qfcos .
Not every public charity or private foundation in Arizona may become a QCO. In order to become a QCO, the organization must submit an Application for Certification to the Department of Revenue, submit all the required documentation including financial statements, and obtain a Notice of Certification. These applications are normally processed quickly, and an organization should receive their approval (or denial) within 2 weeks or up to 30 days, depending upon the time of year. Organizations which qualify will also receive a 5-digit code number, which the donor must include on Form 321 when filing their Arizona tax return. Once approved as a QCO, the organization retains this status indefinitely as long as it continues to meet the criteria; however, the Department of Revenue may periodically request recertification from the organization.
In order to have its application to become a QCO approved by the Department of Revenue, an organization must meet ALL of the following criteria:
- Be exempt from federal income taxes under Section 501(c)(3), or be a designated community action agency that receives community services block grant money pursuant to 42 USC sec. 9901;
- Provide services that meet immediate basic needs. Services include case assistance, medical care, child care, food, clothing, shelter, job placement and job training services or any other assistance that is reasonably necessary to meet immediate basic need and that is provided and used in Arizona;
- Serve Arizona residents who receive Temporary Assistance for Needy Families (TANF) benefits (not only food stamps, which are known as SNAP), are low income residents whose household income is less than 150 percent of the federal poverty level (the federal poverty level varies upon location and number of person in the household), or are chronically ill or physically disabled individuals. Chronically ill or physically disabled individuals are individuals whose primary diagnosis is a severe physical condition that may require ongoing, medical or surgical intervention;
- Spend at least 50% of its budget on services to all individuals (previously but no longer limited to children) who have a chronic illness or physical disability (again, individuals whose primary diagnosis is a severe physical condition that may require ongoing, medical or surgical intervention) and who are residents of Arizona;
- Affirm that it will continue spending at least 50% of its budget on qualified services to qualified Arizona residents; and
- Certify that it does not provide, pay for or provide coverage of abortions, and it may not provide any financial support for any other organization which does so.
A tax credit is available in the State of Arizona for donations to Qualified Charitable Organizations (QCOs), up to $400 for individuals and heads of households, and $800 for married couples. The donor has until April 15 to make the donation and may take the tax credit either in the same or prior year from making the donation. Even though the Federal and State of Arizona deadlines for filing and payment have been extended until July 15, 2020, the deadline for making a QCO tax credit donation remains April 15, 2020. The April 15 deadline also applies for gifts for the QFCO, STO, and Public School tax credits.
By Daniel A. Packard, JD, MBA
Copyright 2020 by Daniel A. Packard, JD, MBA. All Rights Reserved.