Donations to Your Nonprofit
Donations are a major source of income for many nonprofits, but there are special rules about how your nonprofit can accept donations.
For nonprofit organizations that cannot get grants or are intimidated by the application process, the primary way to gain funds is by soliciting donations from the public. For organizations that qualify as charitable, a donation is tax-deductible for the giver. However, if a donor receives something for the donation, then only the amount in excess of the value of the item is deductible.
The IRS requires nonprofits to tell donors what portion of their payment is deductible.
Donations to other nonprofit organizations (such as social welfare, business leagues, and so on) are not deductible unless they are legitimate business expenses. Donations made to an organization (such as a trade association) that are normally deductible as business expenses are limited if the organization engages in lobbying. An organization that engages in lobbying must keep a record of what portion of its budget is used for lobbying and must let members know that this portion is not tax-deductible.
Organizations should keep in mind that besides soliciting immediate gifts from the public, they should also look for bequests in people's wills. People who might only make small donations during their lifetime might be willing to make much greater contributions once they no longer need money. This is especially true of those with large estates and few or no children.
Charitable Solicitation Laws
Because of abuses by some nonprofits in the past, numerous laws regulate the solicitation of money for charitable purposes. Federal, state, and many local governments have acted to protect the public from abuses.
In many states, your organization must register before it can begin solicitations. If you plan a national solicitation campaign, you need to know the requirements of all fifty states.
Fortunately, there is a movement to simplify the process. A uniform registration form has been proposed and accepted by most states. Also, a great deal of guidance is available to nonprofits, and much of it is free.
Because of our constitutional guarantee of free speech, the regulation of fundraising by nonprofit organizations must be very narrowly drawn. Nonprofits are not considered commercial enterprises, so their regulation cannot be as broad as other areas. However, the regulation that has been allowed is still a substantial burden and requires strict compliance.
Federal laws concerned with charitable solicitations mostly deal with the tax aspects. The biggest abuse in this area occurs when donors are led to believe that their payments to organizations are deductible when they are not.
Groups to which donations are not deductible are required to state in their solicitation that payments are not deductible as charitable contributions for federal income tax purposes. There can be serious penalties for failing to notify donors about non-deductible contributions.
Although donations to nonqualified groups are not deductible as charitable contributions, in some cases they may be deducted as business expenses.
Example: A real estate agent may deduct dues to a real estate board.
However, any part of the dues used to lobby the government is not deductible, and organizations that are exempt under Sections 501(c)(4), (5), and (6) must make their members aware of what amount is not deductible.
For groups to which donations are deductible, there are three rules that must be followed when a donor gets something in exchange for his or her gift:
- Only an amount in excess of the fair value of the premium is deductible.
- When the amount is over $75, the donor must be given a written statement indicating what amount is deductible.
- When a donation is over $250, the donor must be given a written receipt. See IRS Publications 526 and 557 for more information.
The biggest burden on fundraising by nonprofits is that most states require registration and disclosure. Some also require filing fees or bonds that can cost hundreds of dollars. For national organizations, it is a considerable burden to keep track of the laws in all fifty states, send for the filing forms, keep track of all the different deadlines, and compile all the required information. For small nonprofits just starting out, it is practically impossible.
If you are a new organization that needs to raise funds, follow these guidelines. First, find out if you are exempt. Each state has different categories of groups that are exempt. Exempt groups typically include religious organizations, schools, hospitals, and some clubs. Also, most states have a dollar limit, such as $10,000 or $25,000, and you are exempt until your donations reach that level.
If you do not fit under any of these exemptions, you need to consider registration. If you will be doing most of your fundraising in your own state, you should start by getting the registration information (if registration is required in your state) and by learning the system so you can comply with those regulations. Next, you could expand your fundraising into the states that do not have registration requirements. The following states do not have registration requirements:
- South Dakota (telephone solicitors must register)
Your next step could be to start registering on a state-by-state basis. If your potential donors are concentrated in a few states, then of course, those are the best ones to start with. If not, you could start with the states with the simplest or cheapest registration, or the states with the highest population.