“Not all Contributions are Equal”
Basking in the excitement of your upcoming benefit event in a few weeks, you are suddenly jolted out of your reverie as your assistant places her hand over the mouthpiece of the receiver of her finger wheel desk phone. She pauses and says
“How much of the benefit dinner ticket payment is tax deductible?”
Tilting your head towards the ceiling for a moment, you turn to her “That is an excellent question, can I get back to you on that because I do not have an answer right off the top of my head?”
Two hours later, back in the studio with your research resting on top of the other paperwork splayed out on your desk, you begin to go through your summary of findings:
- All donor contributions are NOT tax deductible. For a contribution to be tax deductible, the recipient non-profit organization (NPO) must be incorporated with the state. The incorporation can be done online with the secretary of state.
- Following incorporation, the NPO can apply for tax exempt status at the federal level.
- The NPO has to apply for recognition as a 501(c) or a tax-exempt organization by applying for a federal tax ID number which is part of the submission made for 501(c) status. 501(c) organizations receive tax-exemption by not paying taxes on certain types of income and sales tax but NOT all 501(c)s receive charitable status whereby donors receive a tax deduction for their donations.
- 501(c)(3) status for a NPO allows donors to receive a write off for donations received. These organizations must keep adequate records related to the donations received and limit unrelated business activity. Taxes are due on net profit from unrelated activities and are eligible for bulk mailing permits. There are different types of 501(c)(3) organizations –
- Public charities have a higher donor tax deductible giving limit and governance is at arms-length, i.e. without private benefit to any director, officer or key employee. They must be supported by the general public.
- Private Foundations allow for greater control even by related parties and can be funded by an individual or even a family.
- Private Operating Foundation – This is a hybrid of the first two.
- In exchange for a contribution to the fundraising event where they received a gift or even a meal, donors should not claim a tax deduction for the portion of the donation that paid for the fair market value of the gift or dinner.
Every donor’s tax situation is different and therefore the NPO’s approach is to qualify their statement to the effect that “the organization is a 501(c) (3) NPO and that any contributions MAY qualify as a charitable deduction for tax purposes” as opposed to the blanket statement “your contribution is tax deductible”.
The benefit gala ticket is $90 and the market price for the dinner is $55/person. The tax deduction is limited to the balance of $35 over the market price of the dinner received in exchange for the donation.
A statement to the effect that “the estimated value of the dinner provided in return for your donation is $55” can be included in the thank you note or other acknowledgment to the donor.
Are you one not to be deterred in your drive to help with fundraising, but without having to go through incorporation and filing for tax exempt status?
All hope is not lost. Volunteer opportunities on the fundraising committee of an established tax exempt non-profit organization abound. There is also fiscal sponsorship often used by NPOs that have not received tax exempt status by the Internal Revenue Service (IRS), to attract funding that will through its fiscal sponsor be tax deductible to donors.
A fiscal sponsor is a tax exempt nonprofit corporation that receives and disburses funds to groups that may or may not be incorporated. Making it clear in writing the responsibilities and obligations of both the fiscal sponsor and sponsored organization reduces any potential for confusion and enhances good record keeping practices. One of the monumental benefits of fiscal sponsorship is that even where an organization is unincorporated, donors may still be eligible for a tax deduction for their contribution.
There are numerous benefits that come with raising money for a charitable cause and with a variety of ways to accomplish those goals at the fundraiser’s disposal, it is even more feasible. All contributions may not be equal, but with the different options available to the fundraiser, there is a good chance of all such donations being eligible for a tax deduction which is music to the ear of any donor.
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