Have you seen an invite to a nonprofit organization’s event that is similar to the one featured in the above image? If you work with a nonprofit organization, have you sent out an invitation like this?
This invite example brings up an important topic for nonprofit organizations and their donors: charitable contributions and tax-deductions.
Should a nonprofit organization advertise that all donations will be tax deductible?
When might donations be tax-deductible?
What guidelines should nonprofit organizations follow when talking to potential donors?
What should donors know about the organization when they donate?
These are some of the questions I want to discuss in this article, but before we get started, a disclaimer: I am not providing you with any form of legal advice. I am simply sharing what I have learned. Before you make any legal decisions, you should contact your legal advisor.
Now, let’s get started.
Receiving Tax-Exempt Status
In order for a donation to a nonprofit organization to be tax-deductible, the nonprofit organization must receive tax-exempt status. (I discuss when to file for tax-exempt status in this article). Ultimately, tax-exemption boils down to the nonprofit organization filing for 501(c)(3) status. You do this by filing IRS form 1023.
According to the Small Business Chronicle,
To receive tax-exempt status, all nonprofit organizations have 27 months from the date of inception to obtain an IRS ruling that recognizes the corporation as tax-exempt. The organization must be a charitable, religious or educational organization that serves the public for common good.
Now, there are also some caveats to my answer above (that a donation will be tax-deductible when an organization has received tax-exempt status).
If a nonprofit organization receives their status within the 27 months from the date of inception, all of the donations that have been made to the organization from the time of inception are likely to qualify for tax-deductions for the donor.
Otherwise, if a nonprofit organization receives their tax-exempt status after 27 months from the time of inception, only donations made from the time that they send in the form 1023 will be tax-deductible.
Are All Donations to Tax-Exempt Nonprofit Tax-Deductible for the Donor?
The short answer to the question above is, no.
Whether or not a donor’s donation is tax-deductible depends on a number of factors. For instance, when the donation is made, the purpose of the donation and the personal tax situation of the donor all affect whether or not a donation is tax-deductible.
Ultimately, whether or not a donation is tax-deductible for an individual is between the donor and his or her tax advisor (and the IRS). Charitable donations and deductions are filed by donors on their individual tax returns, and it is up to the donor and his or her advisor to determine the amount of money that can be deducted.
This leads us into our next question:
Should Nonprofit Organizations Advertise that All Donations to their Organization Will be Tax-Deductible?
Stating that all donations will be tax-deductible can often be misleading because of what we just discussed.
Instead of putting a blanket statement on your advertisements, invites or website, it is a better idea to tell your donors if you have received 501(C)(3), tax-exempt status, or if you have filed for tax-exempt status. This allows the donor to make their own decision about whether or not they think they will be able to receive a tax-deduction for their donation to your organization.
A nonprofit organization should never give tax advice to their donors. It is between the donor and their tax advisor—not your organization, the donor, and the tax advisor.
As I mentioned earlier, whether or not a donation is tax-deductible is very individual. The IRS also has quite a few guidelines based on what kind of donation is made and how much a donation is worth.
That being said, here are some common donation examples and their common tax-deductions:
Donations that Give Something in Return to the Donor
When a donor receives something in return for their donation, they can only claim a portion of the donation as a tax-deduction.
For example, lets say your nonprofit organization holds a gala. You charge $150 for each seat, and you have catered in a dinner that costs $35/person. In this case, only $115 can be tax-deductible for the donor because they received a dinner in return for their purchase.
I like how it was put here:
The technical way of saying this is “The tax deduction is limited to the excess of the contribution over the fair market value of any items received in exchange for the donation.” To help donors estimate the deductible portion of a donation, you can include one of the following statements in a receipt or thank you letter, depending on the circumstances: No goods or services of any value were provided to you in exchange for your donation. Or: The estimated value of goods or services provided in return for your donation is $_____.
Donations of Household Goods
In general, any household goods that are donated to a nonprofit organization (such as clothing, old furniture, etc.) are only tax-deductible up to their fair market value. In other words, if you were to try to sell the shirt that you donated, how much would it be worth? Likewise, if you were to sell the car that you donated, how much would it be worth? (Some of these larger items, like a car or land will need to be appraised to find out their fair market value at the time of donation.)
One tax-deduction that gets overlooked is the time and money volunteers spend. Do your volunteers pay for their own gas during volunteer time? Do they buy their own volunteer uniform? These are costs that might be tax-deductible depending on each volunteer’s situation.
Now, this is probably the most important section for nonprofit organizations. It is your responsibility to acknowledge donor’s gifts and contributions to your organization so that they may receive their tax-deductions.
Generally, sending an email or a card with the following information will suffice:
- Organization’s name
- Donation or contribution amount
- Date of Contribution
- Whether or not any goods were received by the donor for their contribution (like the dinner example above)
In addition to these 4 things, make sure to let the donor know that they will need to keep this record for when they file their tax-return.
Wrapping It Up
Wow. I don’t know about you, but that was a lot of information to take in, and I didn’t even go into the nitty-gritty details.
To sum up:
- Make sure you file for tax-exempt status with the IRS. This will allow donors to receive some sort of tax-deduction for their charitable contributions to your organization.
- Do not claim that all of a donor’s donations will be 100% tax-deductible. The amount of tax-deduction a donor can claim is found on a personal basis.
- Make sure to send donors an acknowledgement of their charitable contributions. In order for any donations to be tax-deductible, the donor must have in their possession a record of the contribution.
Another Interesting Tax-Deduction Topic to Look Into
- Why it might be financially beneficial for a donor to donate appreciated stocks to a nonprofit organization
Related Articles and Sources
- Tax Deductions for Charitable Giving – The Nonprofit’s Responsibilities
- IRS Charitable Contributions, Publication 526
- Charitable Contributions You Think You Can Claim but Can’t
- Charitable Contributions
- Q&A: What are the current IRS gift acknowledgement guidelines? by Chuck McLean