The Ventura Pranas Quarterly Newsletter (July – September 2023)
- You Ask, We Answer (Charitable contributions)
- Parallel Universes
- Prabha’s Office Location
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We’re far from done with the year, but we’re aware that we’re in the final stretch of the calendar year.
Our recent travels and client meetings, both in the US and in India, have revealed that we need to spend more time with clients on the East Coast of the US (New York City and Hoboken – look forward to seeing more of us!) and in Bangalore. In addition, as several clients of ours move to Singapore, we’re looking to do more advisory and planning work for our clients there too. We will holding an event in Singapore on Friday December 15th at the Singapore Indian Chamber of Commerce at 31 Stanely Street, Singapore.
(To register, please email us at firstname.lastname@example.org ).
For this newsletter, we’d like to focus on the theme of charitable contributions. As always, we keep learning from our clients, their complex financial situations and their issues (this is also why we enjoy what we do) and of late we’re realizing the complexity in making charitable contributions as many of our clients are exiting their companies and are thinking about giving back.
We also would like to thank our clients for their understanding in permitting us to enjoy a break in the form of a Rest & Recuperative break in the week leading up to Diwali. It helped the team unwind with the family and enjoy some much needed downtime. We believe this break is here to stay and we plan to keep it every year although the dates will vary with when the Diwali falls.
Wishing you all the very best!
Prabha, and the Ventura Pranas team
You Ask, We Answer (Charitable contributions)
How can a US citizen living in India contribute to a US charity?
A U.S. citizen living in India can contribute to a U.S. charity but will not necessarily be able to avail the deduction on their Indian returns. U.S. citizens, regardless of where they reside, have the right to donate to U.S. charities and claim deductions on their U.S. income tax returns, subject to certain IRS rules and limitations. Here are some key points to keep in mind:
- Tax Deductibility: To claim a tax deduction for charitable contributions made to a U.S. charity, the donation must generally be made to a qualified tax-exempt organization recognized by the IRS. Not all organizations qualify, so it's essential to ensure that the charity you plan to support is eligible for tax deductions.
- Income Tax Filing: U.S. citizens living abroad are still required to file U.S. income tax returns, and they can typically report their charitable contributions on their tax returns to claim any available deductions.
- Foreign Currency: If you are donating from India, it's important to keep records of the donation, including the amount, date, and recipient charity's information. You may need to convert the donation amount from Indian currency to U.S. dollars when reporting it on your U.S. tax return. Not all Indian charities fall under permissible charitable deductions in the US.
- Tax Treaty Considerations: Be aware of any tax treaties between the United States and India that might affect your tax situation. Tax treaties can impact how income, including charitable contributions, is taxed and reported.
- Consult a Tax Professional: Tax laws can be complex, especially when dealing with international donations. It is advisable to consult with us so we can provide guidance tailored to your specific situation.
- State Tax Considerations: In addition to federal tax rules, you should also consider any state tax implications if you maintain ties to a particular U.S. state. State tax laws regarding charitable deductions can vary.
- Donor Advised Funds: Some U.S. citizens living abroad choose to use donor-advised funds (DAFs) to facilitate their charitable giving. DAFs are charitable accounts that allow donors to make contributions and recommend grants to eligible U.S. charities over time. This can simplify the process of giving and tax reporting.
Are the rules different for stock versus other kinds of contributions? How does the income tax deduction work for a US charity versus for an Indian charity?
Yes, the rules for charitable contributions of stock (securities) can differ from those for contributions of cash or funds (money). Here are some key differences and considerations:
- Valuation: When you contribute stock, the value of the donation is based on the fair market value of the securities at the time of the donation. This value is generally determined by the stock's current market price on the date of the gift. In contrast, when you contribute cash or funds, the value is the amount of money you donate.
- Capital Gains Tax: One significant advantage of donating appreciated stock is that you can potentially avoid paying capital gains tax on the appreciation in value of the stock. If you were to sell the stock and then donate the proceeds, you might be subject to capital gains tax on the profit. However, when you donate the stock directly to a qualified charity, you can usually avoid this tax.
- Deductibility Limits: The tax deductibility of contributions, whether in the form of stock or cash, is subject to certain limits. Generally, you can deduct up to 30% of your adjusted gross income (AGI) for cash contributions to public charities, while the limit is 20% for contributions of appreciated securities. Excess deductions can be carried forward for up to five years.
- Reporting Requirements: When you donate stock, you need to report the contribution on your tax return, specifying the type and quantity of securities donated, the name of the charity, and the date of the donation. The charity should provide you with a written acknowledgment of the gift, which you may need for tax purposes.
- Donation Methods: To donate stock, you typically need to transfer the securities to the charity's brokerage account or provide the charity with the necessary information to facilitate the transfer. This process may involve coordination with the charity and your brokerage.
- Minimum Holding Period: In some cases, there may be a minimum holding period for stock to qualify for favorable tax treatment. For example, if you've held the stock for less than one year, the deduction may be limited to your cost basis rather than the fair market value.
- Charity Requirements: It's essential to ensure that the charity you plan to donate stock to is eligible to receive such contributions and has the necessary accounts and procedures in place to accept and process securities donations.
- Qualified Charities: To claim a deduction, the recipient charity must be a qualified tax-exempt organization recognized by the IRS. Not all organizations qualify, so it's important to verify the charity's status.
How can an US citizen living in the US contribute to an Indian charity?
The fact is this is only permitted as long the Indian Charity is FCRA approved. Therefore, US persons cannot gift to Indian charities at will. They should consider if the charity has an FCRA authorization first. Oddly even a US person living in India is not permitted to give to an organization that is a Charity in India unless it is FCRA approved,
How long does it take to get an FCRA approval? What are the criteria?
Criteria for a charitable organization in India to get FCRA approval:
- Registration: The organization must be registered under the appropriate Indian law, such as the Societies Registration Act, 1860; the Indian Trusts Act, 1882; or the Companies Act, 2013. It should have a proven track record of charitable activities.
- Three-Year Existence: The organization must have been in existence for at least three years before applying for FCRA approval.
- Prior Permission: If the organization is newly established or does not meet the three-year requirement, it can seek prior permission from the Ministry of Home Affairs (MHA) for a specific project or purpose.
For example, the Rotary club of Madras has an FCRA approval so a lot of the time money goes through the club, but the club just becomes a dispersal channel.
What should one keep in mind for the US charity and India charity to partner with each other?
The following criteria should be addressed:
- The Indian charity should have FCRA approval.
- Both charities should share ideology and purpose, and a similar commitment to outcomes and deadlines.
- Financial transparency and some due diligence to make sure books are clean.
- Compliance with regulations (including FARA – Foreign Agents Registration Act).
- Cultural sensitivity and communication.
What criteria should the US based charity fulfil?
- Charitable, Religious, Educational, and Scientific Purposes:To qualify for 501(c)(3) status, an organization must be organized and operated exclusively for one or more of the following purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. These organizations are often referred to as "public charities" or "private foundations."
- When the US charity applies for approvals to the IRS it will make it part of its objects to fund similar activities by the counterpart Indian charity.
Stories and scenarios you can relate to, for families in the US and in India, to help you understand the complexity (and humour) involved in financial planning. Please note that the following is simply a case study. Any references to names and situations are entirely coincidental.
In this issue of Parallel Universes, we explore the theme of charitable contributions, highlighting the differences between an Indian citizen making a contribution to an Indian non-profit from the US, versus a US citizen, living in India and making a donation to an Indian non-profit.
Rashmi is an Indian citizen, originally from Bangalore, but she’s been living in the US for the last 20 years. Rashmi moved to the US for her Masters, but has since lived there, started a company and is hoping to exit soon. During the last 20 years, Rashmi has visited Bangalore frequently and she’s heartened to see the interesting and genuine work that many non-profit organizations are doing in India. She wants to set aside a large portion of her funds for charity, and she’s wondering how she can do this without accruing capital gains tax on the shares of the company that she plans to contribute to the charity.
Since Rashmi is an Indian citizen with a green card working out of the US, her contribution may not be prohibited by FCRA (she is not a US person or US citizen). However, she wouldn’t get the charitable tax deduction in the US either.
Our best solution for Rashmi is that she acquires an organization in India that already has 3 years of standing (3 year requirement for FCRA approval), failing which, she can start a charitable organization with an Indian relative, but then she’d have to wait for 3 years before getting an FCRA approval and making a contribution. Either way, we’d also advise Rashmi to bring on her trusted Indian relatives as trustees of the charitable organization, and then start another charitable organization in the US, with the purpose of connecting these two later. The FCRA approval is not so much for Rashmi to contribute directly to the Indian charity as much as it is for the Indian charity to receive funds from a US charity that will provide Rashmi with a mechanism to deduct the contribution in the USA.
For the charity set up in the US, Rashmi will have to make a specific application to the IRS saying that this charity is looking to expand its charitable goals beyond US borders. There’s a process to this, but it’s possible to get the required permissions.
Contrast Rashmi’s situation with Rajan, coincidentally Rashmi’s colleague from her first job in the US, who moved to Bangalore around 15 years ago to start a tech company with some of his friends. Rajan is looking to exit this company soon- as are his cofounders. Like Rashmi, Rajan is also very inspired by the NGOs and non-profits doing tremendous work in the field of education, medical facilities and senior citizen care. Since Rajan is a US citizen, planning his exit from an Indian company, we’d advise him to create an Indian charity and then transfer some of his stake of the Indian company to the Indian charity preferably before a term sheet and a valuation event since this contribution will not be deductible on his US returns the play here is to ensure that the gains relating to these shares is fully exempt from tax in India and USA (that charity also has to obtain FCRA approval). This way, when the exit happens the charity will also sell its shares and there is an income tax exemption if the charity sells the shares within one year to save on capital gains tax. The play here is therefore saving taxes rather than where the contribution will be deductible.
Prabha’s Office Location + appointments
Our director, Prabha Srinivasan will be in available for appointments in Bangalore, Singapore and Los Angeles over the next quarter. Below is her schedule:
Trichy: November 16th and 17th 2023
Bangalore : November 27th and 28th 2023
Singapore: December 15 - 17th 2023
Los Angeles: February 29th to March 18th 2024
To book an appointment, send in an email to email@example.com , along with details of what you would like to discuss, as well as your time zone so we can schedule the call or appointment for an appropriate time. Alternatively, email Prabha directly at firstname.lastname@example.org
Presentation and discussion in Singapore on December 15, 2023
Prabha Srinivasan will be at the SICCI on Dec 15th Friday at 5:30PM for talk on “Three States, One problem!” Please pass the word around and we are happy to send you a link for the Zoom presentation in case you are interested in attending and are in a different time zone.
Please register for this by emailing us at email@example.com