DAFs are a popular tool that provide donors with a tax-efficient way to give…but applying these funds incorrectly could lead to penalties for both your organization and the donor. Here’s how to ensure that you are applying DAFs properly.

What is a donor advised fund?

A donor advised fund (DAF) also known as a charitable gift fund or philanthropic fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. A DAF allows a donor to make a tax-deductible contribution to the fund and then recommend grants from the fund to a specific public charity. This is great for year-end tax planning if donors are not yet sure which charities they would like to support but want to get the tax deduction before year end.

The use of DAF’s has been on the rise since Tax Cuts and Jobs Act of 2017 (TCJA). DAFs allow individuals to maximize their tax benefits by bunching charitable contributions to exceed the higher standard deduction threshold resulting from TCJA.

Can you use a DAF for a pledge payment?

Check out our blog, Building Trust with Donors: Why Proper Pledge Recording is Essential for important background on pledges.

If you are considering applying a payment from a DAF to a donor pledge commitment, be mindful of the IRS stipulates that DAFs cannot be used to fulfill a donor’s personal legally binding pledge commitments. Violating this rule results in potential penalties for both the donor and the sponsoring organization.

Below are a few other areas that DAF facts that you should be aware of:

• DAFs can only be used to support IRS-qualified, 501(c)(3) organizations
• DAFs cannot be used to pay for tickets to fundraising events, galas, or auctions unless the cost is fully tax deductible
• DAFs cannot be used to pay for items or services purchased or won at a charity auction
• Misusing DAF payments could jeopardize the sponsoring organization’s tax-exempt status and damage your reputation

How can you ensure you’re managing DAFs properly?

Make sure you:

• Comply with the above IRS rules and have a thorough understanding of the restrictions and regulations.
• Maintain clear communication with donors . Many organizations send regular email reminders outlining the proper use of DAFs, especially around popular giving times, and major fundraising events.
• Track and document the source of DAF contributions to comply with legal and ethical standards.

In conclusion, Donor-Advised Funds are a powerful tool for charitable giving, but they come with specific rules and regulations that must be followed to avoid penalties and protect your nonprofit’s status. By understanding the limitations surrounding DAFs, maintaining clear communication with donors, and ensuring proper documentation, you can safeguard your organization while encouraging tax-efficient giving. Properly managing DAFs will not only help you avoid costly mistakes but also foster trust and transparency with your donors, ensuring long-term success for your nonprofit.