Receiving and maintaining a 501c3 nonprofit status are no easy tasks. There are multiple pointers on the checklist you need to comply with – or your status will be in jeopardy. This article covers one area where compliance is a must – 501c3 fundraising.
Note: While we aim to cover as many laws and regulations as applicable in this article by its publish date, do keep in mind this is not a legal document, and you must always talk to a legal or financial advisor about 501c3 compliance.
501c3 fundraising is regulated
A majority of the states in America are required to register their nonprofit organizations if they intend to solicit donations. Ideally, nonprofits hire accountants or CPAs to audit their fundraising and report it to the IRS to maintain their 501c3 status.
While a 501c3 status guarantees that nonprofits will be exempt from tax on fundraising activities, exceptions exist, such as income earned from non-exempt purposes. Ethical fundraising requires that nonprofits solicit donations keeping transparency at the core of their operations.
The following sections discuss the exceptions and how your nonprofit can comply with regulations.
Rewinding to check your 501c3 fundraising status
A 501c3 status is granted to public charities, private foundations, and private operating foundations. For public charities, it is essential that most of their donations come not from a single person or a single group of people but from the general public. It is this criterion that determines the public’s support of this charity.
A 501c3 fundraising status means that this nonprofit is exempt from taxes to the IRS. Organizations that work in the following areas can consider registering for a 501c3 status:
- Testing for public safety
- Animal or child cruelty prevention
- Fostering amateur sports competition.
In addition to working in one or more of these areas, the nonprofit must also:
- Not benefit a single individual or stakeholder in the organization through its profits or earning.
- Use any profits earned for tax-exempt purpose only.
- Operate only for tax-exempt purposes.
- Restrict its political and lobbying activities.
Private foundations must divert most of their resources toward exempt activities. Donors to such organizations receive only upto 30% deductions in tax.
With these conditions in mind, let us explore the 501c3 fundraising guidelines for nonprofits.
501c3 donation rules
We get into the details of 5 501c3 fundraising regulations that every nonprofit must follow.
The biggest perk of a 501c3 status is that donors get to write off their donations as tax-exempt when filing returns. This encourages more contributions to a 501c3 fundraising initiative. Individuals can claim upto 50% of their adjusted gross income as tax-deductible. However, regarding a 501c3 organization, there is no limit to how much an individual can donate.
On the part of the organizations, they need to operate solely for its exempt purposes to remain tax-exempt. For example, if the organization works towards animal welfare, they need to focus on activities only related to it.
While some income from other sources is allowed, a substantial amount of the organization’s income cannot come from it. A public charity can only operate with a heavy focus on its tax-exempt purposes.
A UBIT (Unrelated business income tax) is levied on organizations that earn more than $1000 in income from other sources, which are classified as:
- A trade or business
- Regularly conducted
- Not substantially related to the charity in terms of its tax-exempt purposes.
|What is tax-exempt status?|
Tax-exempt means that such organizations do not have to pay a tax on any donation or income they receive. This also means that individuals contributing to the organization can write off their donations as tax-exempt.
However, even if these organizations are tax-exempt, they still need to share their annual audits with the IRS.
Cash and Non-Cash Donations
501c3 organizations can receive cash and non-cash payments.
Under cash payments, they can accept donations in the form of:
- Credit card payments,
- Electronic fund transfers.
Non-cash donations include:
- Motor vehicles,
- Volunteer time
Non-cash donations are subject to additional rules. You may have to provide additional substantiation for specific donations. We cover them below:
If an organization sells, exchanges, or disposes of the donated property within three years of acquisition, they need to fill out form 8282, called the donee information return form.
However, if the property’s value is less than $500 or if it is distributed for charity purposes, you may not have to fill out form 8282.
Publicly traded securities
These non-cash assets, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds, are generally donated to charity since the transfer is easy. Donors avoid capital gains tax by upto 20% by donating these assets.
However, as your legal advisor would suggest, additional attestation applies to these donations.
Charitable property deductions
Donors donating the property to charity organizations must provide a qualified appraisal to substantiate any charitable deduction. They can fill out form 8283 for the same. This requirement is mandatory if the property value exceeds $5000.
Additionally, if the noncash asset crosses $500 in value, the donor must fill out form 8283 and provide their income tax return.
If a donor donates property that is still in debt, then it complicates the process of receiving the gift. Such a transaction is considered a bargain sale, and the property’s equity will get a charitable deduction. A donor must, however, be very careful when donating such a property as it could accelerate the repayment timelines of the amount due.
Special rules apply to the donation of motor vehicles to 501c3 fundraising initiatives.
Here are some rules to remember when soliciting motor vehicle donations:
- A charity must not use motor vehicles in a manner that benefits private stakeholders. It must be used to further their tax-exempt purposes only.
- If you hire a for-profit entity to operate your vehicle donation program, they must establish an agency relationship with the charity.
- A written acknowledgment of the donation must be attested if the value of the motor vehicle is above $500. This should include the donor’s name, tax identification number, vehicle identification number, and contribution date. In addition to that, they must also have any of the following statements:
- A statement of good faith in case the charity provided something in exchange for the donation,
- A statement if no goods and services were exchanged,
- and a statement that the goods and services exchanged were intangible religious benefits, if that is the case.
You can refer to this document by the IRS for the entire section of special rules that apply to motor vehicle donation: https://www.irs.gov/pub/irs-pdf/p4302.pdf
These are 501c3 donation rules for non-cash donations.
Donor substantiation laws require that nonprofits provide written substantiation of any contributions over $250. If donors do not receive these documents, they will not be able to apply for deductions when filing their income tax returns, and the charity will be penalized.
501c3 fundraising guidelines highlight that if any goods or services were exchanged by the charity in exchange for the donation, then it must be mentioned in the written acknowledgment.
Although the responsibility of receiving the substantiation lies with the donors, charities must comply in order to maintain the charitable deductions of their donors.
Unreimbursed expenses of volunteers to a charitable organization are also considered charitable deductions. These could include:
- Travel expenses such as stay and tickets,
- Commuting expenses,
- Parking and tolls.
Fair market value
Fair market value (FMV) is used by nonprofits to determine the value of donated items. It is used for non-cash donations, especially property and real estate dealings.
This value is then used by the donor to file for tax deductions. Many times, small nonprofits find it difficult to determine the FMV due to:
- Finding the process tedious and time-consuming.
- Failure on the executives’ end to understand the importance of maintaining an FMV document.
- The required disclosure is too lengthy and takes up a large part of the tax acknowledgment letter.
However, determining the FMV is imperative according to the rules laid out by the IRS and is only fair to donors.
Certain types of donations are ineligible for tax deductions. These donations include:
- Political contributions – 501c3 organizations are prohibited from contributing towards political activities. These contributions will not uphold your 501c3 status.
- Contributions designated to individual – Charitable organizations should only work towards their tax-exempt purposes. Any donations made to an individual person may be ineligible.
- Payment for membership dues – The IRS considers membership dues as unrelated business income. Any income earned through contributions in this manner will be taxable.
501c3 spending rules:
Let’s look at the different areas in which spending rules govern 501c3 organizations.
A 501c3 organization can spend funds only related to its tax-exempt philanthropic purposes. As we discussed above, if the nonprofit falls under one of these categories- charitable, educational, religious, scientific, literary, or other specified purposes, then it is only under this category that they can make spends.
Any expense should be made keeping its mission and purpose in mind.
Prohibition of private benefit
Any funds and assets accrued during a 501c3 fundraising initiative cannot benefit private individuals or stakeholders. Charity organizations are bound to further the cause for which they have received tax-exempt status.
501c3 organizations can earn profits and use them to run their organization, compensate their workers, and more.
However, payment for roles must be according to fair market value. Any excessive compensation might be flagged for benefiting private individuals.
Program expenses vs. Administrative expenses
To maintain the 501c3 status, a charitable organization must spend a significant amount of money on program expenses that directly impact its mission. Administrative expenses, while valid, cannot exceed the amount spent on program-related activities.
The purpose of the charity is to serve public interests ultimately.
Fundraising events and associated costs can be very expensive. Charities spend approximately $160 on average to acquire a single new donor. It takes nonprofits two years to recuperate donor acquisition costs.
Keeping these numbers in mind, charitable organizations must justify their fundraising efforts. Any expenses related to marketing, event planning and organizing, campaigns, and more need to be accounted.
Reporting and transparency
Even though 501c3 organizations are tax-exempt, it does not mean that they do not have to report their finances to the IRS.
A detailed and timely account of their income and expenses, usage of funds, contributions, etc., must be reported to the IRS. Depending on the size and type of organization, they must file an annual Form 990 or something similar.
Once an organization receives grants or funds, it must ensure that they comply with and rules and conditions imposed by the grant. Complying with the regulations set by the grantor is imperative to maintain 501c3 status.
FAQs about 501c3 fundraising
We answer common FAQs about 501c3 fundraising regulations.
Can donors give restrictions on their donations?
Yes, donors are entitled to place restrictions on their donations. They can do so by drafting a gift agreement or writing a letter to the charity they donate to.
Charities must follow these restrictions if they choose to accept the donation. However, if the restrictions are not palatable to the organization, then they can decline the donation.
Grants are one of the major sources of restricted donations, in which the grantor sets rules that the charity has to follow. These restrictions could include not accepting grants from another institution, using the grant money only for specific purposes, etc.
Can A 501c3 donate cash to another 501c3?
Yes, one 501c3 organization can contribute to another. They can also set up monthly or recurring donations with another charity.
However, the donor organization will be held responsible for any misuse of funds by the receiving organization. Therefore, charities must do their due diligence to avoid such circumstances.
A few other things to consider before such a donation are:
- A lack of conflict of interest.
- No violation of donor restrictions.
- The donation should not jeopardize the financial situation of the donor organization.
What is (and isn’t) deductible
The table below showcases donations that do or do not qualify for tax deductions:
|Donations eligible for deductions||Donations not eligible for deductions|
|Aligned with tax-exempt purposes||Promise to pay|
|Property||Game of Chance donations through raffle, bingo, etc.|
|Tangible assets such as mutual funds||Post-dated checks for donation|
|Money, checks, credit card payments for tax-exempt purposes||Gifts that benefit a donor such as receiving a t-shirt in exchange for a donation.|
Can a 501(c)3 nonprofit organization donate to an individual?
501c3 fundraising regulations suggest that charities can donate to individuals. However, these individuals must be beneficiaries according to the organization’s mission.
This means that if a charitable organization is working towards education, they can donate to a student struggling to pay their fees, who will be considered a “worthy individual” to receive the contribution. This does not mean charities can help their friends pay their children’s fees if they are well-to-do.
Are game-of-chance funds tax-deductible?
Any income that a charity earns through a game of chance events will be taxed since they are considered unrelated business income. These games are also illegal in some states and could lead to a loss in the 501c3 status.
Some states require that nonprofits file a separate form disclosing income from such sources. They may also be eligible for gaming excise taxes as defined by the IRS.
An event where alcohol is served will require a special alcohol license from the nonprofit.
501c3 fundraising made easy
Since 501c3 fundraising regulations mandate public support, finding ways to make your charity reach the masses is imperative.
At CallHub, we’ve designed a fundraising template that will help you plan for and acquire donors in an organized manner. This template includes:
- Details on all the steps you need to take to plan your campaign.
- Checklist and fields to collate essential data in one place.
- Template to map out fundraiser timeline and strategy.
Happy fundraising! And stay compliant.
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