Its Fundraising Reason: Donor Deduction Cheat Sheet
One of the main attractions of nonprofit fundraising is that ‘your gift, donation, sponsorship or silent auction item is tax deductible’, and the smart folks are sure to add the language “ the the extent allowed by law”.
Most of the time, this is true. However, as with everything else in life, there are some exceptions and rules that go along with taking the value of that gift off your taxes. Making sure you get the details right can make the difference between smooth sailing or headaches with accounting later.
Overall, if you are a nonprofit, the taxes you must pay are payroll taxes and taxes on “Unrelated Business Income” ( See You Bet for UBIT), that is income you raise from sources other than the nature of your business, for instance, if you teach swimming lessons, and you sell cupcakes, the income on the cupcakes is taxable.
Promoting a private company through your nonprofit for fundraising is generally considered advertising, which for the vast majority of you, this is an unrelated business, and technically can be taxed for the non profit, and not deductible as public support by the donating company.
Safe Harbor from the Feds:
Luckily, the IRS has created a safe-harbor to help tax-exempt organizations determine the difference between taxable advertising and acknowledgement of sponsors. The IRS exempts payments known as “qualified sponsorship payments,” from unrelated business income tax (“UBIT”). To make sure this tax treatment is done properly, the sponsorship be structured so that it is a qualified sponsorship payment rather than taxable advertising.
Qualified Sponsorship Safe Harbor. Payments accepted with no expectation that the sponsor will receive a “substantial return benefit” in exchange for the payment are not considered taxable advertising. Therefore using or acknowledging of a sponsor’s name, logo, or product lines in connection with charitable activities is not considered a substantial return benefit and will not cause a sponsorship payment to be treated as taxable advertising income.
Exception: Payments that are dependent on the level of attendance, broadcast ratings, or other aspects showing the amount of public exposure does not qualify for the sponsorship safe harbor.
What About Exclusives: The right to be the only sponsor of an activity or the only sponsor representing a particular business or area is generally not a substantial return benefit. The portion of any payment attributable to an exclusive sponsorship arrangement, therefore, may be a qualified sponsorship payment.
Be careful: However, if you agree to limit distribution of competing products or services in connection with the payment, the benefit will be deemed a substantial return benefit and will be taxable. For instance, you only allow the sponsor’s brand of their product of aspirin or cleaning services to be offered, this could be considered advertising and not sponsorship.
Activities that are considered to fall within the safe harbor include:
- an acknowledgment of a sponsor as the exclusive sponsor of an activity of the organization;
- use of a sponsor’s logo or slogan (so long as they do not contain qualitative or comparative descriptions of the sponsor’s products, services, facilities or company) in connection with an exempt organization’s activities;
- a list of the sponsor’s locations, telephone numbers or Internet addresses, and value-neutral descriptions on the nonprofit’s website or in connection with its activities.
Taxable Advertising. In contrast, taxable advertising is defined as ‘any message or material (whether broadcast, transmitted, published, displayed, or distributed) that promotes or markets the sponsor’s trade or business or any of its services, facilities, or products’.
This includes any messages containing:
- Qualitative or comparative language: “ No one does it better…..”
- Price information or other indications of savings or value, or “Best value on the market today”
- Endorsement or an inducement to purchase, sell, or use any company, service, facility or product. “Endorsed by the Arthritis Foundation”
The Bottom Line:
IRS corporate sponsorship regulations enable exempt organizations to recognize the support of a sponsor without having to pay tax on the income.
Beware: If, however, the nonprofit promotes or markets the goods or services of a sponsor, the sponsorship will be treated as advertising and the income may be taxable as UBIT and will not count as public support.
Protect Yourself: To protect corporate sponsorship payments from treatment as taxable advertising, nonprofits should consider entering into written Corporate Sponsorship Agreements that appropriately limit acknowledgment to communications or displays that qualify for the sponsorship safe harbor.
Cheat Sheet To Stay Out Of Trouble:
- A nonprofit organization should NEVER place a value on what is donated, but rather simply state what was donated.
- ALWAYS provide a detailed receipt including amount, date, type, any restrictions and the appropriate language regarding the non exchange of gifts or services and to consult with tax experts.
- The 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: Your organization provides the legal appropriate documentation ONLY.
- Exception: gifts of property over $5,000, which require independent appraisals.
- 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. *
*careful here, check out the car donation organization carefully- some are not the most ethical.
Are raffle tickets to benefit a qualified charity deductible?
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. See the table on page 2 of IRS Publication 526.
Are gifts of services deductible?
No. (Sorry, I get asked this all the time, doesn’t seem fair.)
The IRS regulations are based on the idea of a donor’s offsetting income received by giving it to a qualified nonprofit, so if there is no income, there can be no deduction; because there is no tax liability for services rendered.In other words, since no ‘income activity’ is produced when those services are provided, then there is no ‘shelter’ for the value of that work,no “taxable event” against which to claim the deduction took place.
Are art work donations deductible by the artist?
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. However unfair, the ‘work’ of the artist is considered a service and falls under the above rule.
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. Keep all your receipts.
Fair Market Value: the amount for which real property would be sold on the open market.
- When fair market value (FMV) is lower than cost (basis), use FMV as the deduction amount.
- For event tickets: if the FMV, cost, of the dinner, walk or concert is $40, and you sell tickets for $100, the deductible amount is the difference between the ticket and the cost: $100- $40, the legal deductible amount is $60.
- If you purchase a pair of earrings at a silent auction for $400, and their FMV is $4000, you don’t get to take a deduction, but you got an awesome deal!
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.”
Exception: 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.
From the Horse’s Mouth: IRS Language for Corporate Charitable 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.
“…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.”
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 (UBIT). Yes, nonprofits may sometimes have to pay federal income tax! Check first and proceed carefully.
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.
Did You Actually Get This Far?
If so, thank you !– I know this isn’t the sexiest stuff on the planet, but its important to know before you get into trouble.
These technicalities may seem hair- splitting and tedious, until an auditor or the IRS comes calling and really messes up your day. Making sure that the information you provide your donors and sponsors is accurate and appropriate, that last thing you would want it a gift that blows up in someones’ face.
We can help, all you have to do is ask……310 828 6979
image credit: https://si.wsj.net/public/resources/images/WE-AA790_DONATE_P_20141211154537.jpg
- https://www.irs.gov/pub/irs-pdf/p526.pdf: see the examples on pages 3 and 7 of IRS Publication 526.