You are interested in starting a nonprofit organization. You have a million-dollar idea and you are already planning your first fundraising event.
When can you legally receive donations and contributions to your organization? Do you have to wait until you have filed your 1023 form and received your 501(C)(3) documentation?
- You are allowed to fundraise for your organization before you receive 501(C)(3), tax-exempt status, but these donations will not be tax deductible for the donor.
- If your organization files for tax-exemption within 27 months of incorporation, then when you are granted tax-exempt status it will be retroactive to the date of incorporation. This means that if you are on top of filing for tax-exempt status your donors will most likely be able to receive tax deductions for their charitable contributions made before you received your exemption status.
- If you file for tax-exemption after the 27 months and receive 501(C)(3) status, it will become active from the date that you filed your 1023 form.
But wait (again)!
What about State rules on fundraising? Do you have to first prepare and file a Charitable Solicitation Permit in your state?
- In order to receive donations for your organization, you must file for a Charitable Solicitation Permit within any and every state that you will be asking for donations from.
- Be sure to check with your own state on specific guidelines before you begin seeking funding.
What about having a “donate now” button on my website? Technically anyone can donate from all across the United States. Does that mean I need to have a Charitable Solicitation Permit in every state?
- I found a great article that discusses this point. The article is called State Registration Requirements for Fundraising. I would highly recommend that you take a look at the article:
Currently 40 states in the United States require charitable organizations to register when engaged in solicitations within the state. Charitable solicitations are broadly defined, to include almost all methods of oral, written, or online requests for contributions. The entity does not have to be physically present in a state to be soliciting (e.g., sending a letter or e-mail into the state is usually enough).
With the growth of prevalence of online activities, the line of when a solicitation in a state occurred became blurred. Although adopted into law by a few states, the “Charleston Principles” serve as helpful guidelines for determining when charitable solicitations on the Internet trigger charitable registration requirements in a state.
Generally, registration is required under the Charleston Principles in a particular state in the following scenarios: (1) the charity specifically targets a person in a particular state, such as sending an e-mail to a person that the sender knew or should have known resided in a state or specifically requesting “people in X state should donate to this cause,” or (2) the charity engages in passive solicitation (for example, uses a “donate now” button), but receives “substantial” or “repeated and ongoing” contributions from residents of a particular state. Therefore, if using a “donate now” button, or other passive Internet solicitation, it is generally recommended under the Charleston Principles that the organization register in states in which the organization has a physical presence—such as where the principal office is located, and then after the donate now button is active, to the extent possible, the organization access whether a substantial number of donations are being received from certain other states.
Although the Charleston Principles provide useful guidance, we have found that practically, once an organization uses an online functionality for donation, it is likely that it will trigger registration requirements in all 40 states. This is because even if the organization receives only one donation in a state, there is almost always some form of follow-up via e-mail or letter. The follow-up action will be deemed to target a resident of that state and require registration.
Therefore, large charities often find it most efficient when increasing fundraising efforts to register in all 40 states as opposed to having to constantly re-evaluate income received from various states and the solicitations taking place in those states. In addition to law firms, there are a number of third-party companies that can perform nationwide registrations and annual renewals on a cost-efficient basis if the organization does not want to take on the registration in-house.
An important point to remember is that organization should never give tax advice to donors. You can inform donors if you are tax-exempt (or if your application is pending), but do not guarantee that their donations will be completely tax deductible.
The article above is for informational purposes only and is not intended as legal advice.