Taxes: charitable organiaztion; academic competitions?

Question

I've thought about starting a foundation to help break the cycle of poverty in the inner cities.

The vision is a foundation to host academic competions for inner-city youths with cash 'gifts' for the best academic performance on some sort of standardized tests. Would this be considered gifts or earnings by the IRS? Ideally I don't want to ask folks for social security numbers and mess with all the paper work etc.; but staying legal is, of course, top priority.

Answer 1

The prize money you plan on awarding will be taxable income to the recipients. If they have no other income and the prize money is under the filing requirements, then no taxes would be due.

If you award a prize of $600 or more, you are required to get the SSN of the recipient and issue a 1099MISC to the awardee, with a copy to the IRS.

Answer 2

Non-Profit charitable organizations typically fall under section 501(c) of the tax code. As long as your income is derived and spent in accordance with your stated objectives, you probably will not be subjected to income taxes. However, this in and by itself does not preclude the possibility of your having to file income tax returns with IRS and/or with your state of residency and/or incorporation.

If you are really sincere in doing something like this, I would very strongly recommend that you consult with an attorney. You might also want to contact another charitable organization such as the Salvation Army to obtain their viewpoint on this. While your motives are admirable, you could be opening up a can of worms, unless you obtain legal counsel.

I would strongly recommend that you seek legal counsel, preferably from an attorney who specializes in taxes.