One of the main benefits of creating a 501(c)(3) nonprofit organization is the ability to accept tax-deductible donations. The IRS designation 501(c)(3) indicates that the nonprofit is exempt from federal tax. However, in order to stay exempt and ensure donors can deduct their donations, it is essential to follow the IRS rules for written disclosures, record-keeping and annual reports.
If a donation is over $250 and the donor did not receive anything in return from the nonprofit, the donor may only report the contribution on his taxes if the nonprofit provides the donor with a receipt, known as a written disclosure. The disclosure must include the name of the organization, the amount of the donation, and whether any goods or services were given in exchange for the donation.
Read More: Non Profit Donation Rules
Quid Pro Quo & Non-Cash Donations
If the nonprofit gave anything in exchange for a donation, the donor must have a written disclosure for any donations over $75. The donor will only be allowed to report the donation for the amount over the value of the goods or services received. In other words, if a donor gave $100, but received a free massage worth $50, she may only report a $50 donation on her taxes. Nonprofit 501(c)(3) organizations may accept both cash and non-cash donations, such as clothing or household goods. To report the donation on a tax return, the donor must receive a written disclosure from the nonprofit. However, volunteer time is not tax deductible.
In order to properly prepare for filing informational returns with the IRS, 501(c)(3) organizations must maintain records of the donations received, including the names of the donors and the amount of donations. Further, nonprofits must separate taxable from non-taxable income, meaning that 501(c)(3) organizations must have the ability to track the source of all their income. If the organization solicited donations or organized fundraising events, the IRS recommends that the organization keep records of advertising and other fundraising material used to promote donations or events. For example, the nonprofit should keep records of emails sent to potential donors, and advertising copies for events.
All 501(c)(3) public charities must file an annual informational return with the IRS. Depending on the size of the organization's budget, the nonprofit must file either form 990, 990-EZ, or 990-N. For nonprofits with larger budgets that file forms 990 or 990-EZ, the return must include Schedule A, which provides the amount of donations received by the nonprofit. If the organization received more than $5,000 in donations from a single contributor, it likely will file Schedule B, which lists the names of all the contributors.
Elizabeth Rayne earned her J.D. from Penn State University and has been practicing law since 2009, advising clients on issues ranging from employment law to nonprofit management. For two years, she served as a contributing editor for the "Vermont Environmental Monitor."