Non-Profit Series: 8. Tax-deductible Contributions

Written by Sagan L. Carman-Downer

The previous article in this series explained that one of the benefits of a non-profit organization obtaining 501(c)(3) status, is that contributions made by others are tax deductible. This means that the person or business that donates (the donor), can deduct that amount from their taxable income, which may help lower their tax burden. The non-profit that is receiving the donation (the donee), and the donor, must comply with certain federal rules regarding disclosures and recordkeeping. This article will explain some of those requirements for cash contributions. It’s important to note that the requirements discussed in this article are for cash contributions, and will differ if the contribution is in the form of goods or services.

Requirements of Donor

To take the tax deduction, the donor is required to keep a record of the contribution. For a cash contributions (which includes cash, checks, electronics funds transfers, debit cards, credit cards, and payroll deductions), the donor must keep one of the following: a bank record (canceled check, bank statement or credit card statement); a receipt from the donee; or a payroll deduction record. Simply keeping track in a check register will not be enough, one of the above records must be retained in order to deduct the contribution from the donor’s taxable income.

If the donor makes a cash contribution of $250 or more, they must also get an acknowledgment from the donee. This acknowledgment is explained in more detail below.

Requirements of Donee

If the donee receives a contribution of more than $75 from one individual or business, they must provide a disclosure statement to the donor. The disclosure must be written, must note the value of the contribution, and must inform the donee that the contribution is tax-deductible. If the donee does not provide this disclosure statement, the IRS may impose a fine on them.

As mentioned above, if the donee receives a cash contribution of $250 or more, they must provide an acknowledgment to the donor. The acknowledgment must meet the following requirements:

·         It must be written;

·         It must include the amount of cash contributed;

·         It must indicate whether the donor received goods or services for the contribution (including the value of the goods or services); and

·         It must be received by the donee before their tax return for that year is due.

This article provides a general guideline of the disclosure and record keeping requirements for cash contributions to non-profit organizations that have qualified for tax-exempt status under 501(c)(3). There may be additional requirements for larger cash contributions, and the requirements for contributions of goods or services will differ significantly. There are also additional rules on whether the donor can deduct these contributions, and if they can, how much can be deducted. The extent to which contribution is deductible will depend on each individual’s circumstances, so it would be best to speak with an attorney or other tax professional to discuss your specific situation.

Non-Profit Series: 7. Benefits of 501(c)(3) Status

Written by Sagan L. Carman-Downer

The previous article in this series explained what the term 501(c)(3) means, and briefly which organizations can qualify for tax-exempt status under 501(c)(3). As explained in that article, many non-profit entities seek tax-exempt status under this provision as charitable organizations.

In order to qualify under the charitable portion of 501(c)(3), your organization must be operated for a purpose that is recognized by the federal government as “charitable.” Purposes that are recognized include:

• Relief of the poor, the distressed, or the underprivileged;
• Advancement of religion;
• Advancement of education or science;
• Erecting or maintaining public buildings, monuments, or works;
• Lessening the burdens of government;
• Lessening neighborhood tensions;
• Eliminated prejudice and discrimination;
• Defending human and civil rights secured by law; and
• Combating community deterioration and juvenile delinquency.

When seeking tax-exempt status, the non-profit organization must go through an application process to be recognized as having 501(c)(3) status. During this process, the organization must ensure that they operate for one or more of the purposes listed above to qualify as a charitable organization.

If the organization’s application is approved, it will be considered tax-exempt for purposes of federal law. There are two major tax benefits to obtaining 501(c)(3) status. First, the organization is exempt from paying federal income tax. Second, the organization can receive tax deductible contributions. This allows people who donate to the organization to deduct their contribution from their income, which may lower the income tax they would otherwise owe. This provides a direct benefit to the donors, and an indirect benefit to the organization. Because the donors’ contributions may help lower their tax burden, it can encourage donors to contribute to an organization that has 501(c)(3) status over one that doesn’t.

If you believe your organization could benefit from having status as 501(c)(3), it is best to speak with an attorney in your state to discuss the requirements further. This article provides general guidelines, but you should seek advice specific to your situation to determine whether this is the best option for your organization.

Non-Profit Series: 6. What is a 501(c)(3)?

Written by Sagan L. Carman-Downer

The term 501(c)(3) is commonly used to refer to a non-profit organization. But what, exactly, is a 501(c)(3)? This goal of this post is to explain what this term means, and what types of organizations have 501(c)(3) status.

501(c)(3) is not actually a term that describes an entity itself, but instead describes its status (a non-profit corporation can’t technically BE a 501(c)(3), but it can have 501(c)(3) status). The term 501(c)(3) refers to the provision in the United States Code (federal law) that grants certain entities an exemption from paying federal income tax. Section 501(c)(3) is a specific part of Section 501. Section 501, appropriately captioned “Exemption from tax on corporations, certain trusts, etc.,” provides, with detail, what entities are exempt from paying federal income tax. Here is a link to a website that displays the actual language of Section 501 if you are interested in reading it https://www.law.cornell.edu/uscode/text/26/501.

Section 501, as a whole, includes the provisions allowing the exemption. The wording of the section is broken down into subsections, paragraphs, subparagraphs, etc. In the term 501(c)(3), 501 is the section, (c) is the subsection, and (3) is the paragraph. Subsection (c) provides a specific list of what entities are allowed the exemption, each one explained in a separate paragraph. There are 29 categories of entities (and thus 29 paragraphs) listed under Subsection (c) that are allowed the exemption; Paragraph (3) is just one of those 29.

Although there are 29 categories, many non-profit organizations fall under the category in Paragraph 501(c)(3), which provides that the following entities are exempt, “Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes…” The explanation of entities included in this paragraph continues, but many non-profit corporations fall under the “charitable” portion of this paragraph. Thus, if you are a charitable non-profit corporation, you are exempt from having to pay federal income tax pursuant to paragraph 501(c)(3).

Simply stating that a non-profit corporation’s activities are charitable, though, isn’t enough to qualify for this tax exemption. To be exempt under this provision, your activities must meet the federal government’s definition of “charitable.” To learn about what activities are considered “charitable” check back for the next article in this series.