The IRS and Charitable Deductions
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. Thanks!

What is the difference between a nonprofit and IRS tax-exempt status?

Typically, a nonprofit is incorporated with the state where its headquarters is located. Bring incorporated as a nonprofit does NOT automatically mean that contributions made to the organization are tax deductible on a donor's federal income tax return.

In order for donors to receive the benefit of a charitable deduction, the nonprofit corporation must apply to the IRS for recognition, and be granted recognition, as a tax-exempt organization under Federal (US) law. The application form is called a Form 1023.

Recognition by the IRS allows a qualifying nonprofit organization to inform donors that charitable gifts made to it may qualify for deduction from the donor's taxable income.

NOTE: neither nonprofit status not tax-exempt recognition mean that a nonprofit organization never pays taxes. Some nonprofits and 501(c)3's pay federal income taxes as well as various state and local taxes.

How should our organization receipt a charitable gift?

If your nonprofit is recognized as a 501(c)3 nonprofit by the IRS, then your donors may be eligible to deduct (from their taxable income) contributions made to your organization. The receipt your nonprofit provides to the donor is the donor's way to document the appropriateness of claiming the deduction.

For detailed information on receipt requirements, check out IRS Publication 1771 on the IRS web site.

REMEMBER -- A nonprofit organization should NEVER place a value on what is donated, but rather simply state what was donated. Also, a nonprofit organization should NEVER state that a contribution IS deductible -- contributions MAY BE deductible, based on the donor's particular tax situation.

Placing value on gifts and assessing their deductibility is the donor's job. The nonprofit assists by providing appropriate documentation ONLY. [The exceptions to this involve gifts of property over $5,000 (where independent appraisals are required) and donations of vehicles of any value (where the charity has to report to the donor the ultimate disposition of a donated vehicle and the cash value of that disposition).]

Are raffle tickets to benefit a qualified charity deductible?

No. The IRS considers the chance to win a prize to be something of value received in exchange for the "contribution" to receive the raffle ticket. A charitable deduction, generally, may only be taken on donation amounts greater than value received, so raffle ticket purchases are not deductible as charitable gifts. See the table on page 2 of IRS Publication 526.

Are gifts of services deductible?

No. The IRS regulations are based on the idea of a donor's offsetting income received by giving it to a qualified nonprofit. If there is no income, there can be no deduction, because there is no tax liability for services rendered. No "taxable event" (against which to claim the deduction) took place. See the table on page 2 of IRS Publication 526 for information on what may and may not be deducted as a charitable contribution.

Are art work donations deductible by the artist?

No, not really. An artist is limited to deduction of the actual cost of the materials used to create a work of art. The creation of the art work is considered a gift of services by the artist (see Are gifts of services deductible? above).

How are auction items' deductibility calculated?

Deductibility by the donor -- a donor may deduct their cost (basis) of tangible personal property donated to a 501(c)3 nonprofit to be sold at auction as a charitable contribution. See http://www.irs.gov/charities/charitable/article/0,,id=123204,00.html for more on this. When fair market value (FMV) is lower than cost (basis), use FMV as the deduction amount.

Deductibility by the successful bidder -- a successful bidder for an item sold at a charity auction MAY NOT deduct the price paid for the item. They received the item in exchange for the "gift." If, however, they can provide written documentation that they paid more than the fair market value for the item, they may be able to deduct the difference between the price paid and the item's fair market value.

For more information, see the examples on pages 3 and 7 of IRS Publication 526.

Corporate chartable event sponsorships, program ads, and charitable gifts

A for-profit business always has the option of claiming business expenses as deductions on its federal tax return. However, sometimes a business desires to claim a charitable tax deduction for a corporate sponsorship or other gift.

There's a line separating advertising from sponsorship that's important for both nonprofits and donors to keep in mind.

Sponsorship includes:

"...any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgment of the business name, logo, or product lines in connection with the organization's activities. "Use or acknowledgment" does not include advertising the sponsor's products or services. The organization's activities include all its activities, whether or not related to its exempt purposes."

According to IRS Publication 598:

"Advertising. A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. For information on the treatment of payments for advertising, see Exploitation of Exempt Activity - Advertising Sales in chapter 4."

Advertising includes:
1) Messages containing qualitative or comparative language, price information, or other indications of savings or value,
2) Endorsements, and
3) Inducements to purchase, sell, or use the products or services.

The use of promotional logos or slogans that are an established part of the sponsor's identity is not, by itself, advertising. In addition, mere distribution or display of a sponsor's product by the organization to the public at a sponsored event, whether for free or for remuneration, is considered use or acknowledgment of the product rather than advertising.

For more information on this, please consult IRS Publication 598: www.irs.gov/publications/p598/ch03.html#d0e929

For nonprofits -- If you choose to solicit advertising (as opposed to sponsorships), your nonprofit organization may be subject income tax on its unrelated business taxable income (UBTI). Yes, nonprofits may sometimes have to pay federal income tax!

For businesses -- Using the IRS definitions above, paying a nonprofit for advertising does NOT qualify as a charitable deduction, though it may qualify as a business expense. Sponsorship may qualify as a charitable contribution.

For more on this, please consult the following IRS web resource (also referenced above): http://www.irs.gov/formspubs/page/0,,id%3D12668,00.html

DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here. Thanks!