Fundraising Guidelines for Charities
Hello, I'm Laurice Ghougasian
I'm Philip Smith. We both work for the IRS Exempt Organizations office
Fundraising is an important activity for most tax-exempt organizations. Most charities couldn't exist without fundraising to bring in the money they need to carry out their exempt purposes.
At the same time, many organizations are not aware of the tax implications that come along with the fundraising activities they participate in. Today we'll briefly discuss ways that organizations raise money and review the important tax rules associated with each.
Charities raise funds in a variety of ways. The IRS Form 990 instructions lists soliciting in person, by phone, direct mail, email and the Internet as well as soliciting both government and non-governmental grants - and conducting special fundraising events. But the tax law doesn't explicitly restrict the type or amount of fundraising that an exempt organization may conduct.
Some typical fundraising events might include: dinners/dances, door-to-door sales of merchandise, concerts, carnivals, sports events, and auctions. And as budgets have gotten tighter and fundraising tougher, many organizations have created new kinds of fundraising activities.
How the income from these events is treated depends upon the "facts and circumstances." The standard by which these are judged is whether the activities substantially further the exempt purpose of the organization, aside from the revenues generated by the activities.
In cases where types of activities are considered unrelated to the organization's exempt purpose, the revenue from them might be considered Unrelated Business Income, often abbreviated as UBI. And UBI is taxable.
UBI is a complicated topic, so we'll go over just the basics here and tell you where you can go for more information if you need it.
There's a three-part test for unrelated business income:
The income must be from a trade or business, which generally refers to activities that produce income - usually from the sale of goods or services.
The trade or business must be regularly carried on which means that the business operates continuously or frequently. An infrequent activity such as an annual fundraiser - a dance, bake sale or car wash, for example - is not considered regularly carried on.
The trade or business is not substantially related to the organization's exempt purpose. That means the activity does not contribute in a significant way to the organization's exempt purpose. However, merely generating income to help support tax-exempt activities is not sufficient for an activity to be considered substantially related. An organization has to consider the size and extent of the activities compared with the nature and extent of the exempt function they serve.
If an activity is on a larger scale than is reasonably necessary for exempt purpose, some of the income may be unrelated business income.
The tax law does have some specific exceptions to unrelated business income, which means the income from activities like this won't be treated as taxable.
First, activities conducted by volunteers. That means a trade or business where substantially all the work for the organization is done without compensation. Some fundraising activities, such as volunteer-operated bake sales, may meet this exception.
Second, any trade or business that is carried on primarily for the convenience of its members by a 501(c)(3) organization or by a governmental college or university. This exclusion is strictly limited to transactions with members, students, patients, officers, and employees. A typical example of this is a school cafeteria.
Third, any trade or business selling merchandise, substantially all of which is donated to the organization, is not taxed. Many thrift shop operations of exempt organizations would meet this exception.
I'd like to emphasize here that just because an activity creates UBI and may result in a tax liability does not mean that the organization has to discontinue the activity. It's only when unrelated activities are substantial compared to all of the organization's exempt activities, that those activities could jeopardize an organization's tax-exempt status.
As I said before, UBI and its related Unrelated Business Income Tax is a large subject. For more details and the reporting requirements, go to IRS.gov and download or order Publication 598, Tax on Unrelated Business Income of Exempt Organizations.
When you hold a fundraising event, keep some things in mind to ensure that your donors can deduct their contributions.
First, check with your state. Many require charities to register with a state agency before asking for contributions from state residents. And they may have their own requirements for solicitations in addition to the IRS requirements.
The best place to find state information is to go to the website of the National Association of State Charity Officials at www.nasconet.org.
Let's talk about what kinds of fundraising activities qualify for deductible charitable contribution. Basically, a qualified charity must conduct the event. This allows the donor to document that the gift was to a charity recognized by the IRS.
If a person or organization other than the charity is conducting the event, for example a professional fundraising organization or, the charity must clearly authorize the person to act as its agent.
What about sponsorships and in-kind donations? Generally sponsorships are considered a business deal but the money given to a charity often is not taxable because it's not considered to be from a regularly carried on trade or business.
In-kind donations from businesses and individuals also require special consideration. Organizations are required to provide a written acknowledgement of the in-kind donation if the value of the donated item is over $250. This acknowledgement must be carefully written so that the value of the items donated are accurately described.
The acknowledgement also must either state that no goods or services were provided by the organization, or describe any such goods or services that were provided and give a good faith estimate of their value.
Donations in excess of $5,000 require that the organization complete Part IV of Form 8283.
This brings us to the topic of gaming. Charities often use gaming activities such as bingo, raffles, pull-tabs or poker tournaments to raise funds.. Gaming activities can result in wagering and excise taxes depending on the gaming activity and the circumstances. For more information about gaming please refer to Publication 3079, Tax-Exempt Organizations and Gaming.
Organizations report their professional fundraising services, fundraising events and gaming on their annual Form 990 or 990-EZ and the Schedule G, Supplemental Information Regarding Fundraising or Gaming Activities. You can download the forms and instructions at The IRS website at www.irs.gov.
The IRS Charities and Nonprofits web page at www.irs.gov/charities has more detailed information and resources for learning about some of the things we've talked about here, including publications, forms and discussions of UBI, gaming, reporting and recordkeeping requirements.
You can also subscribe to our emailed newsletter EO Update to keep you up to date on changes or additions to the Charities & Non-Profits web page. Find the "EO Newsletter" link on the web page and follow the directions.
IRS Exempt Organizations also has a second web site that's devoted to non-profit related online workshops and courses. It's called "Stay Exempt" and the web address is www.stayexempt.irs.gov. There are specific courses on the Form 990, UBI and gaming.