How Can a 501(c)(3) Raise Money?
Nonprofit organizations must register with state authorities before soliciting donations. Regular nonprofit auditing and IRS reporting are crucial for maintaining tax-exempt status. While fundraising activities are generally tax-exempt, income from non-exempt purposes may be taxable.
As a best practice, organizations should engage qualified accounting professionals to ensure proper reporting and maintain their status. Ethical fundraising practices and transparent operations form the foundation of successful nonprofit management, and a professional can be invaluable in helping you achieve this.
Key Requirements for Achieving a 501(c)(3) Status
Tax-exempt organizations are public charities, private foundations, and private operating foundations. Public charitable organizations must demonstrate broad public support rather than relying on a single donor or group. This public support test helps ensure the organization serves community interests rather than private ones.
Eligible organizations typically work in:
- Charitable and educational initiatives
- Scientific research and advancement
- Literary and cultural development
- Religious activities
- Public safety programs, etc.
Here are some further requirements to keep in mind:
- Non-distribution constraint: None of your organization’s earnings can benefit any private individual or shareholder. This means you can’t distribute profits to individuals or use your funds for personal gain.
- Limited political activity: 501(c)(3) organizations are prohibited from participating in political campaigns or endorsing candidates. While you can engage in some lobbying and advocacy, it can’t be a substantial part of your activities.
What Are the IRS Rules for 501(c)(3) Donations?
Let’s dive into donation rules that every 501(c)(3) nonprofit needs to know.
1. Tax Benefits
The primary advantage of 501(c)(3) status is tax-deductible donations. Individual donors can typically deduct up to 50% of their adjusted gross income. Organizations must focus primarily on their exempt purposes to maintain this benefit, though some unrelated income is allowed.
If a 501(c)(3) organization earns more than $1,000 from a business activity that’s regularly carried on and not substantially related to its exempt purpose, it pays the Unrelated Business Income Tax (UBIT). This ensures that nonprofits with these side businesses aren’t given an unfair advantage over for-profit businesses doing the same thing.
2. Different Contribution Types
501(c)(3) organizations can accept both monetary and in-kind donations.
| Cash Payments | Non-Cash Payments |
|---|---|
| Direct monetary donations | Real estate and property |
| Check payments | Vehicles |
| Credit card transactions | Volunteer services |
| Electronic transfers | Securities |
| Wire transfers | Physical goods |
| Mobile payment platforms | Intellectual property |
| Cryptocurrency (with proper documentation) | Equipment and supplies |
| Art and collectibles |
For non-cash donations, there are a few rules to keep in mind:
- Property donation requirements: Organizations must file Form 8282 when selling donated property within three years unless the value is under $500 or used for charitable purposes.
- Securities management: Stocks, bonds, and mutual funds often make attractive donations due to capital gains tax benefits. Keep in mind that additional documentation requirements apply.
- Vehicle donation protocols: The vehicle’s use must align with your charitable mission. If the car’s value exceeds $500, for example, a written acknowledgment is required from the donor.
3. Donor Documentation Requirements
For contributions that exceed $250, written acknowledgment is mandatory. Organizations must specify any goods or services provided in exchange for donations.
When issuing donation receipts, be sure to include:
- Organization’s official name
- Contributing party’s name
- Cash amount received
- Details of non-cash gifts (if applicable)
- Note of no benefits provided (if applicable)
- Value and type of benefits given
- Religious benefits statement (if applicable)
