Fundraising is inarguably one of the most important activities for nonprofit organizations. In fact, most nonprofits can’t exist or sustain their organizations without doing regular fundraising activities. Fundraising rules and regulations can have tax implications for nonprofits, so it’s important that board directors understand them.
Fundraising Activities and Means of Solicitation
Nonprofit tax laws allow for nearly all types of fundraising events unless they violate other laws. Here’s a partial list of common nonprofit fundraising activities:
- Dances and galas
- Door-to-door merchandise sales
- Sporting events
- Internet fundraisers
For the most part, nonprofit boards can conduct fundraising by soliciting funds over the phone, in person, over the internet or via direct mail as long as they abide by fundraising rules and regulations. They can also solicit governmental and non-governmental grants.
There are some special circumstances in which nonprofits may be subject to taxation. Whether that happens depends very much on the particular facts and circumstances of the fundraising activities. The legal standard for whether fundraising activities remain tax exempt is determined by whether they substantially further the exempt purpose of the organization and whether funds collected are separate from funds that other activities generate.
Some types of activities are considered unrelated to a nonprofit’s tax-exempt purposes. Under certain circumstances, funds that are generated from fundraisers may be categorized as Unrelated Business Income, which is also known as UBI. Nonprofit board members should be aware that UBI is taxable.
Three-Part Test for UBI
To reduce any confusion around determining whether UBI is taxable, the Internal Revenue Service (IRS) has established a three-part test for UBI. Under these circumstances, income could be taxable under UBI if:
- The income comes from a trade or business (this generally refers to income-producing activities such as the sale of goods or services).
- The income-producing trade or activity is something that stems from a continuously operated business, or at least one that operates frequently. Dances, bake sales and car washes aren’t considered regular businesses.
- The trade or business doesn’t substantially relate to the organization’s exempt purpose. The activity shouldn’t contribute in any significant way to the organization’s exempt purpose. In considering how to assess UBI, boards should consider the size of the fundraising activities and their extent compared to the exempt function they serve. Activities that generate funds on a much larger scale than what serves the exempt purpose can be considered UBI and would then be taxable as income.
Tax laws do offer some exceptions for what is considered UBI, as follows:
- When all activities are conducted by volunteers.
- When activities are primarily carried on for the convenience of its members, such as transactions between a school cafeteria and the students and employees who eat there. The exclusion strictly pertains only to members, students, patients, officers and employees.
- When the profits from the sale of goods are all donated back to the organization.
The IRS offers additional information on UBI in Publication 598, which is entitled Tax on Unrelated Business Income of Exempt Organizations.
Nonprofit board members should also be aware of state laws that relate to solicitations and donations. Board members can find more information about fundraising rules and regulations at the National Association of State Charity Officials website.
Fundraising Rules and Regulations Related to Deductible Charitable Contributions
In order for donors to claim a donation on their tax return, the donee must be a qualified charity as recognized by the IRS.
Professional fundraising organizations may conduct a fundraising event on behalf of a charity. The charity must provide clear authorization for the professional fundraising organization to act as its agent in order for contributions to be tax deductible.
Although sponsorships fall under the category of a business deal, they’re usually not taxable because they’re usually only occasional events and they’re not connected with a regular business or trade.
In-kind donations are a type of donation where a group or individual donates an item or their time. In this case, when the donated item or time is valued at over $250, the charity should provide a written statement that describes the in-kind donation and its monetary value. The statement should also indicate that the organization didn’t provide any goods or services, and if they did, the statement should describe those goods or services and provide a good faith estimate of their value.
As part of their compliance responsibilities, nonprofit boards must complete Part IV of IRS Form 8283 when they receive donations over $5,000.
Special Rules for Income Generated by Gaming Activities
Many nonprofits are finding that gaming activities are a fun and entertaining way to generate funds for their charities. Activities such as bingo, raffles, poker tournaments and other gaming events often draw big crowds that generate large donations for a single event. Nonprofit boards should be aware of the circumstances that could result in wagering or excise taxes. IRS Publication 3079, entitled Tax-Exempt Organizations and Gaming, provides additional information on taxes and gaming.
The IRS also provides Form 990 and Form 990-EZ at their website for more information on professional fundraising services, fundraising events and gaming.
This website provides information on fundraising and tax implications. The IRS also offers specific information on how nonprofits can hold onto their tax-exempt status.
Using Board Management Software to Gain an Edge in the Nonprofit World
Board management software such as BoardEffect’s is a valuable tool for nonprofit boards that are serious about fundraising activities and that desire to follow the fundraising rules and regulations. The board portal provides an online platform where board directors can collaborate on planning for fundraising activities to ensure that events go off without a hitch. A board portal system also provides a platform where nonprofit boards can schedule various fundraising events at prime times during the year in order to maximize their fundraising efforts. BoardEffect’s platform offers unlimited, cloud-based storage for fundraising documents and all other board documents where board members can access them around-the-clock using any electronic device.
Nonprofit board members must fulfill their duties responsibly at all times. If they don’t exercise due diligence in board matters, they can be held legally liable. Board meeting minutes and other documents provide legal protection for board directors to demonstrate that the board understands their legal responsibilities related to fundraisers and that they’re committed to following them at all times.
A board portal software system is a vital tool for nonprofit boards that also protects their documents and communications with the highest security features available. This system is a must to ensure that nonprofits follow all fundraising rules and regulations.