Rules for Accepting Donations as a Nonprofit Organization

By Joe Runge, Esq.

Rules for Accepting Donations as a Nonprofit Organization

By Joe Runge, Esq.

Receiving donations at a nonprofit organization requires that you understand the rules set out by the Internal Revenue Service (IRS) and the state in which you formed your nonprofit. With a bit of care, you can be sure that your donations benefit your organization and that your donors get the tax benefits they deserve.

woman in blue shirt looking over paperwork in home office

Rule #1: Gift Must Be for NonProfit Purposes

A donation must be a gift. Legally, a gift is something given without any consideration in return.

For tax purposes, the deduction for a donation is the value donated minus the value of any benefit received. For example, if your donor bids on a vacation rental at a silent charity auction, the donor may only deduct the amount of the bid minus the market value of the vacation rental.

The donation must also be for a valid charitable purpose. The IRS sets out legitimate charitable purposes, such as religious, scientific, or community benefit. To qualify to accept 501(c)(3) donations, your nonprofit must have already demonstrated one of those purposes. It is important that contributions to your 501(c)(3) further that purpose.

Rule #2: Gifts Are Different Than Unrelated Business Income

Most conventional forms of solicitations—such as galas, auctions, fun runs, or even internet fundraising—are entirely allowable tax-exempt donations. Where it gets murky is when it comes to unrelated business income, or UBI.

UBI is more akin to conventional business income rather than a donation. The tax code lays out several factors that define a UBI:

  • The transaction is a trade or business.
  • It's ongoing and regular.
  • It's not related to the nonprofit's purpose.

Say you start a nonprofit related to childhood literacy and create a colorful mascot that becomes popular on social media. Suppose you start selling toys and other merchandise that feature your mascot. In that case, you might be drifting away from charitable donations and toward UBI, even if you use the proceeds to run your childhood literacy organization.

How you conduct that business matters. If every toy features the mascot wearing a literacy-promoting T-shirt, your chances of steering away from UBI improve. If, however, your charity's website is gradually taken over by your business of selling merchandise—even though it promotes literacy—the regularity and scale of the business may overwhelm its charitable intent.

Rule #3: Gifts Require Written Acknowledgment of Donations

To be deductible under the Internal Revenue Code, contributions for charitable donations of $250 or more require a written acknowledgment to substantiate the gift. The acknowledgment must include your nonprofit's name, the amount of the donation or the value of the donated goods, and a statement of any goods or services received in return for the gift.

Adequate acknowledgment is an essential service your donors need to claim their tax benefit. It is also a tangible way to remind them of their experience donating to your nonprofit. It's one more way to leave a good impression and, hopefully, get more donations.

Nonprofits live and die by the goodwill of their donors. The most important service you can provide your donors is complete compliance with the law. Making sure that all the legal requirements are in place to accept donations for your nonprofit is the core of that compliance. Without it, your donors may not keep donating to your worthy cause.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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