When Is a Nonprofit Gift Not Tax Deductible?

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A nonprofit organization risks losing credibility and can even face charges of fraud if it misleads or misinforms donors about the tax status of their gifts. At the same time, any gift’s deductibility is only partly contingent on details of the organization itself. The donor must also qualify for a deduction and must take care to verify that the gift will fit his or her personal tax plan.

To avoid giving donors bad advice it’s important that nonprofit employees and volunteers have a clear sense of what they can and can’t say about the tax treatment of a gift. As a rule, nonprofits should not offer tax advice to their donors beyond expressing matters that are entirely within the organization’s control. For example, organizations should be careful about ever telling a donor that a given gift is definitely tax deductible, such as in a solicitation letter. On the other hand, organizations should not feel obligated to advise donors when a gift isn’t deductible.

Deductibility depends on the type of nonprofit

A nonprofit organization can be categorized a variety of ways for tax purposes. The key feature of an organization that calls itself a “nonprofit” is that it doesn’t pay income taxes. But just being a nonprofit doesn’t mean that gifts to the organization are deductible. Many charitable nonprofits and religious organizations qualify under section 501(c)(3) of the Internal Revenue Code.

A donation to a nonprofit set up for political purposes—a 501(c)(4) social welfare organization—is not deductible. Donations to 501(c)(3) nonprofits often are tax deductible, subject to the details of the specific taxpayer’s situation. Such organizations may wish to tell donors that they are qualified under 501(c)(3), but they should take care to avoid telling donors that their gifts are deductible in case the donors can’t claim a deduction for other reasons.

Exchanges for value are not deductible

Another important category of charitable “giving” covers the broad range of circumstances in which the donor will receive something of value in exchange for the gift. In such cases chances are good that the gift can’t be claimed as a deduction. This includes the purchase price of items purchased at a charity thrift store or at a bake sale. It also includes the price of raffle tickets and membership fees to nonprofits like museums.

Where exchanges for value can be especially important is if the donor will give something of substantial value, like real estate, with conditions attached that will benefit the donor, the donor’s family, or the donor’s business. A nonprofit should have a gift policy that spells out the governance steps to be taken when a donor offers something of significant value, so potential problems can be identified before the gift is accepted. In such cases the nonprofit may not have a way of knowing that the gift benefits the donor in a way that would invalidate its deductibility. The donor should be reminded that the tax implications of the gift are the donor’s responsibility.

The Church Law Center can answer your fundraising questions

The Church Law Center of California counsels churches and secular nonprofits in all aspects of their organization and governance. We help clients reach their fundraising goals while complying with the law. To learn how we can help your organization call us today at (949) 892-1221 or reach out to us through our contact page.

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