Individuals and companies that donate to a 501(c)(3) public charity can deduct up to 60% of their AGI. This is not the only rule and regulation the IRS has regarding 501(c)(3) donations. In this article, we’ll help clear up any questions you may have about donating to and from a 501(c)(3), along with exemption restrictions and passthrough donations.
Nonprofits come with a lot of rules and regulations. Nonprofit leaders are expected to know all of them, but realistically, you may miss a lot. One area you cannot afford to misunderstand, though, is regarding donations. 501(c)(3) organizations need to be aware of 501(c)(3) donation rules to be able to accept donations and make donations to other organizations.
This article helps clear up questions you may have regarding donating to and from a 501(c)(3), along with exemption restrictions and passthrough donations.
There are currently 1.7 million active nonprofit organizations in the United States. Most nonprofit organizations are registered with the Internal Revenue Service (IRS) as 501(c)(3) organizations.
There are two types of 501(c)(3) organizations: public charities and private foundations.
Public charities must receive most of their revenue from public donations or government entities. These donations are tax-deductible. One-third of a public charity’s revenue must also come from various backgrounds and classes. That means they must solicit many individuals to remain tax-exempt.
Private foundations are often family-owned and face fewer restrictions than their counterparts, but donors to these foundations only receive a 30% deduction on their donations. Most of the revenue for these organizations comes from investments or endowments. The three different types of private foundations include:
Starting a 501(c)(3) organization can be a complex and lengthy process that includes filing as a corporation with your state and applying for tax exemption from the IRS. Once you receive your exemption letter, several restrictions must be followed to remain tax-exempt.
501(c)(3) nonprofits must have charitable, religious, scientific, educational, and literary purposes, provide testing for public safety, foster national or international amateur sports, or prevent animal and child cruelty. These organizations vary in how they achieve their missions, but regardless of how they meet their goals, donations are treated the same.
As discussed, individuals and companies that donate to 501(c)(3) public charities can deduct their gifts up to 100% of their AGI (Adjusted Gross Income). Contributions to private foundations are also tax-deductible but generally capped at 30% or 50% of the AGI.
Many donors prefer to give to 501(c)(3) organizations because of tax deductions. 501c3 organizations need to get tax-exempt status to be able to offer their donors this option. Donations to 501(c)(3) nonprofits cannot be used in lobbying or political activities.
Some specific rules and regulations must be followed when it comes to 501(c)(3) organizations donating to other organizations. A 501(c)(3) organization can give to another nonprofit. An example of this is a private foundation providing funds to another 501(c)(3) charity. This contribution is commonplace, but before donating, it is vital to ensure your donors approve of the donation and that the other organization is free from scandal.
In addition to 501(c)(3) organizations, 501(c)(3) nonprofits can also donate to 501(c)(4) organizations. These contributions must be used for charitable purposes, and no amount can be used for political activities. When donating to a 501(c)(4) organization, it is essential to know how the gift is used. 501(c)(4) organizations do not have as many restrictions when it comes to political activity. If your gift is used for any of these activities, you may be in danger of losing your tax-exempt status.
501(c)(3) organizations cannot donate to political campaigns.
501(c)(3) organizations can donate to individuals, but these contributions must be made as grants or scholarships. When offering financial support to an individual, a 501(c)(3) organization must award these gifts to a class of individuals and include an application process for those who would receive the gift.
To solicit 501(c)(3) donations, a 501(c)(3) nonprofit must register with its state. 41 out of 50 states and Washington DC require nonprofits to register. Many states also require nonprofits to renew their registration on a regular basis. The IRS provides on its website the requirements for charitable solicitation.
The following are what your state will need for charitable solicitation registration –
Once registration is complete and you can receive 501c3 donations, next, you need to ensure your donors can avail of tax deductions. For that, your 501(c)(3) needs to file Form 1023 or Form 1023-EZ. The former is a longer application form with 26 pages and the latter comprises only 3 pages. The fee is $275 for Form 1023-EZ and $600 for Form 1023.
You should have the following documents/ information ready before filing these forms –
A 501(c)(3) organization’s purpose must be charitable, educational, religious, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
No individual or shareholder can receive substantial financial benefit from a 501(c)(3) organization. Nonprofits also cannot operate for the private interests of their founder, board members, or staff. If a 501(c)(3) organization is found to provide financial support to an individual with influence over the organization, they are in danger of receiving an excise tax and losing their tax-exempt status.
Additional restrictions on 501(c)(3) organizations are for political activities. 501c3 organizations cannot be action organizations. These organizations cannot spend a substantial amount of their time or resources influencing legislation. They also cannot participate in any partisan campaign activity for or against a candidate or party.
One of the primary responsibilities of a 501(c)(3) organization is fundraising.
The following 6 ways organizations can build healthy donor relationships and raise more 501c3 donations.
You must choose the right tool for your audience and your campaigns. Online donations, mobile fundraising, and hybrid events are growing trends that nonprofits are desperate to join. At the same time, managing your donors and creating a lasting relationship with them through targeted marketing and communication are also essential for your 501(c)(3)’s growth.
The fundraising tool you choose must have options for different forms of fundraising as well as donor management. You’d also want to opt for an affordable platform to start with.
Donorbox offers affordable and simple-to-use fundraising and donor management features for nonprofits of all types. Your 501c3 can easily get set up in about a few minutes and without any monthly contract or signup cost. You can also easily manage donors at the backend and segment them for better communication efforts.
Here’s an example of a fundraising page hosted by Donorbox.
Before any fundraising campaign, it is essential to create a strategic plan for fundraising activities and donor relationship building. 501c3 organizations have the advantage of collecting tax-deductible donations, but donors need more to continue supporting nonprofits.
By creating a moves management strategy for all donor types, your fundraising team will work towards building long-term relationships that benefit the organization.
For each campaign or event you create, set up a planning committee comprising board members volunteers, and staff. Delegate tasks to different members and use a single system to keep track of all progress. For example, your donor management tool should include options to record any offline communications and other observations. Your event ticketing tool must let your staff keep track of sold tickets and purchasers’ information. All your donations should be on your fundraising tool so that you are on top of all data and can better your fundraising approach through data-driven fundraising.
With Donorbox, you have all these options in one tool.
Donors react best to stories of individuals. Stories raise awareness, create a connection, and move people to act. By creating a storytelling culture in your organization and sharing specific details on how donors make a difference with their gifts, your nonprofit can help share your mission and entice more donors to give.
Pro tip: Add stories to your fundraising campaigns. They can be about your beneficiaries, a change you’ve recently helped bring to their lives, and how donations help multiply the impact. You can create heartwarming story-based videos where your volunteers and supporters tell their own stories of why they love helping your organization.
Your nonprofit has donors that give once during an event, give monthly, and, if you’re lucky, major donors that entirely fund a necessary program. Communication with these donors must be different.
The best way to plan your donor communication is to start by segmenting donors based on their gift amounts, frequency, and program interests. Once you’ve segmented your donors, create separate fundraising scripts, letters, and emails to solicit donations from these groups. Train your volunteers and staff well so they know how to deal with each group and maintain a long-lasting relationship with all.
Recurring donors are vital to nonprofits. Encouraging donors to give monthly allows nonprofits to plan for the future and add more programs and fundraisers that best fit their donor base.
If you’re having difficulty keeping donors interested long-term, adding a recurring donor campaign may be the best way to address this issue. By making it easier for donors to support your organization and receive regular updates on how their gifts help, you build better connections with your donors and encourage them to continue giving.
Here’s how Muso does it by including a recurring donation form on their website donation page.
Many nonprofits assume volunteers must be used for maintenance, program activities, and event support, but most nonprofits would benefit if their volunteers were also fundraisers. Thanks to technological advancements, peer-to-peer fundraising has become an easy way to encourage supporters to promote nonprofits to their communities and raise funds. This way, your 501(c)(3) can also increase organizational outreach, acquire new donors, and boost donations.
Donorbox lets you create peer-to-peer fundraising campaigns in the simplest way possible. All you have to do is toggle a switch and invite your supporters from the tool itself. Subsequently, your invitees will receive an email invitation and they can easily sign up and create their own fundraising pages to raise funds for your organization.
The following is a great example of a successful peer fundraising campaign.
Launch Your Donorbox Peer-to-Peer Campaign
A 501(c)(3) organization can receive a substantial amount from donors thanks to its tax-exempt status. That is why many organizations work so hard to gain and keep this exemption. The IRS provides clear details on how to remain in good standing.
If you are interested in starting a nonprofit, visit our nonprofit blog to learn more about different 501c organizations to determine which type you may fit. You’ll also find a plethora of other tips and resources on fundraising, nonprofit management, and donor management to help boost your growth and ensure your success.
Donorbox helps nonprofits in a number of ways to raise more and more donations online. Our simple-to-use and easy-to-set-up features include Recurring Donation Forms, Customizable Donation Pages, Text-to-Give, Crowdfunding, Peer-to-Peer fundraising, Events, Memberships, QuickDonate, and more.
If you’re willing to take your fundraising to the next level, Donorbox Premium is here for you – get expert fundraising coaching, a dynamic set of high-performance tools, and priority tech support.
The following questions are common in regard to 501(c)(3) rules and restrictions.
The answer to this question is yes, but gifts to a for-profit organization are not tax-deductible. When soliciting gifts, you must make donors aware of your tax-exempt status.
Nonprofits can contribute to other nonprofits, but you must be aware of restrictions. For example, if the nonprofit you’re donating to is using the donations for political activities then your 501(c)(3) will be at risk of losing its status. In any case, it is vital for nonprofits to keep track of their contributions and how they are used.
Yes. You can receive donations without a 501(c)(3) tax-exempt status. But in most cases, these donations will not be tax-deductible for your donors. Hence, you need to be transparent about it.
Yes, if a donor restricts their donation to a specific program or activity, the nonprofit must follow these restrictions.
Yes. Contributions from 501(c)(3) private foundations to 501(c)(3) public charities are very common and tax-deductible.
501(c)(3) organizations can give money to other 501(c)(3) organizations, 501(c)(4) organizations, and individuals.
Yes. Individual founders, board members, and staff can donate to their own 501(c)(3) organizations. Remember to get a receipt for your donation to claim the gift on your taxes.
Passthrough donations are not recorded as revenue when a nonprofit raises funds for another nonprofit. These funds simply pass through the organization on their way to a specific program.
Kristine Ensor is a freelance writer with over a decade of experience working with local and international nonprofits. As a nonprofit professional she has specialized in fundraising, marketing, event planning, volunteer management, and board development.
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Kristine Ensor