Nonprofit organizations often find it necessary to engage in fundraising activities to supplement their funding over time. Quid pro quo contributions are one common fundraising activity that nonprofits may use.
Those organizations with federal tax-exempt status must comply with certain restrictions under the Internal Revenue Code (IRC) while fundraising to maintain their tax-exempt status. Some restrictions apply to quid pro quo contributions as a fundraising activity. The California Center for Nonprofit Law can ensure that your nonprofit organization is aware of and complies with all requirements to remain tax-exempt at all times, including while engaging in fundraising activities.
Understanding Quid Pro Quo Contributions
A quid pro quo contribution is a payment that is partially a contribution and partially a payment for a benefit in the form of goods or services. A quid pro quo contribution is not an outright purchase or a payment in which there is no intent to donate as part of the transaction. A person makes a quid pro quo contribution to an IRC §170(c) organization or an organization that accepts tax-deductible charitable contributions.
Disclosure Requirements for Quid Pro Quo Contributions
If a quid pro quo contribution exceeds $75, the organization must issue a timely written disclosure statement under IRC §6115. To be timely, the organization must provide the disclosure statement to the donor at the time of the solicitation or when it receives the payment. However, the written disclosure requirement does not apply to IRC §170(c)(1) governmental entities.
The written disclosure statement is a notice that contains the following:
- An advisement to the donor that they only can deduct the amount of the payment that is more than the value of the goods or services that they received; and
- A good faith estimate of the value of the goods or services using any reasonable valuation method.
Keep in mind that even if the deductible portion of the contribution is less than $75, the written disclosure notice is still required if the contribution amount is more than $75. Furthermore, the disclosure statement must be written in a way that grabs the donor’s attention, so using smaller print within a larger document may be insufficient to meet this requirement.
Quid Pro Quo Contribution Disclosure Exceptions
Treasury Regulations provide some exceptions to the general rule that organizations must provide written disclosures for quid pro quo contributions of more than $75. These exceptions include the token, membership benefits, and intangible religious benefits exception.
The Token Exception
Treas. Reg. 1.6115-1(b) states that disclosure notices are not required when the benefits that the organization provides are token or insubstantial. Benefits are insubstantial when they meet at least one of the following three conditions:
- The fair market value of all benefits to contributors doesn’t exceed the lesser of $50 or two percent of the donation;
- The total cost of token items provided to a donor doesn’t exceed $5, based on a minimum donation of $25. Token items include bookmarks, calendars, key chains, mugs, posters, t-shirts, etc., bearing the organization’s name or logo; or
- The organization mails or distributes low-cost token items for free. The donor neither orders, requests, nor expressly consents to the mailing, and the organization informs the donor that the item(s) are theirs to keep.
The amounts referenced in these conditions above are indexed annually for inflation.
The Membership Benefits Exception
Membership fees or dues paid to a qualified §170(c) organization may be tax-deductible. However, dues are deductible only as to the amount that is more than the value of the benefits they received.
Organizations often offer membership fees of $75 per year or less in exchange for certain benefits, which are not subject to disclosure, including:
- Free or discounted admission to the organization’s facilities or events;
- Free or discounted parking;
- Preferred access to goods or services;
- Discounts on the purchase of goods and services; and
- Admission to events open only to members if the organization reasonably projects that the cost per person (excluding any allocated overhead) is not more than $5 (indexed annually).
The Intangible Religious Benefits Exception
Disclosure notices need not describe or value intangible religious benefits so long as:
- A religious organization provides the benefits; and
- The only benefits are intangible or de minimis.
Intangible religious benefits do not include education that leads to a degree, travel services, or consumer goods.
Meeting Quid Pro Quo Contribution Requirements
To adhere to these rules and avoid any issues with donors, organizations offering the potential for quid pro quo contributions should generally:
- Determine in advance how much of the quid pro quo contribution is attributable to the tax-deductible donation and how much is attributable to the benefit or goods and services received;
- Clearly designate these separate amounts in any public communications or solicitations sent out; and
- Clearly designate these separate amounts on any tickets, receipts, or other evidence of payment furnished to donors.
Allow Us to Meet Your Legal Needs
The California Center for Nonprofit Law dedicates its efforts to the daily legal matters that nonprofit organizations face, including maintaining tax-exempt status concerning their fundraising activities. Call us today at (949) 892-1221 and schedule a time to discuss your case. Get your questions answered and learn more about how we can help.
