One of the benefits of supporting a worthwhile cause is the ability to take a federal income tax deduction in some cases. To help contributors to nonprofit organizations understand which of their donations are tax deductible and which are not, the Council of Better Business Bureaus offers the following
Tax Exempt vs. Tax Deductible
"Tax exempt" does not necessarily mean "tax deductible." A tax exempt organization is one that does not have to pay income taxes. Contributions made to certain tax exempt organizations may be deductible on the donor's federal income tax return. While the Internal Revenue Service (IRS) defines more than twenty different categories of tax exempt organizations, contributions to groups in only a few of these categories are tax deductible.
You can determine the tax exempt status of an organization either by contacting the local office of the IRS, or by asking the organization for a copy of its
"Letter of Determination" A "Letter of Determination" is the formal notification an organization receives from the IRS once its tax exempt status has been approved.
You may confirm an organization's status by calling the IRS
(toll-free) at 1-877-829-5500.
Organizations that Solicit Donations
Organizations that solicit contributions and memberships generally fall into one of the following four tax exempt categories: 501(c)(3), 501(c)(4) 501(c)(6), and 501(c)(19). These numbers correspond to the sections of the Internal Revenue Code that describe these organizations.
Note from the MPWCF: we do not solicit
contributions. In the past (and we expect in the future) we have had contributions only
from our Founder.
To obtain a 501(c)(3) tax exempt status, most nonprofit organizations must file documents with the IRS that prove them to be operated for certain charitable purposes specified by statute.
Organizations in the 501(c)(3) category include groups whose purposes are:
* Preventing cruelty to children or animals
* Fostering national or international amateur sports competition
* Testing for public safety
Contributions to all 501(c)(3) organizations, except those that "test for public safety," are deductible as charitable donations for federal income tax purposes.
While its 501(c)(3) status determines that an organization is eligible to receive tax deductible donations, its foundation status determines the limits of an individual donor's deduction.
The three principal classifications of 501(c)(3) organizations are as follows:
A public charity (identified in IRS terms as "not a private foundation") normally receives a substantial part of its income, directly or indirectly, from the general public or from the government. The public support must be fairly broad, not limited to a few individuals or families. Public charities are defined in the Internal Revenue Code under sections
509(a)(1) through 509(a)(4).
Note from the MPWCF: if you look at our IRS Letter
you will see that we are defined as a Section 509(a)3 public charity because IRS
certified our unique characteristics and operating methods. As a
result of this favored status, we are required to do certain things and may not do
other certain things described elsewhere on this web-site in order to preserve
our Section 509(a)3 status.
A private foundation, sometimes called a non-operating foundation, receives most of its income from investments and endowments. This income is used to make grants to other organizations, rather than being disbursed directly for charitable activities. Private foundations are defined in the Internal Revenue Code under section 509(a) as 501(c)(3) organizations which do not qualify as public charities. A private operating foundation is a private foundation that devotes most of its earnings and assets directly to the conduct of its tax exempt purposes, rather than to making grants to other organizations for these purposes. Private operating foundations are defined in the Internal Revenue Code under section 4942(j)(3).
Deductibility Limitations to 501(c)(3) Groups
Individuals giving to 501(c)(3) organizations that are either public
charities, private operating foundations, and certain private foundations
may deduct contributions representing up to 50% of the donor's adjusted gross income if the individual itemizes on his tax returns.
Individuals giving to 501(c)(3) organizations that are private foundations may generally deduct contributions representing up to 30% of their adjusted gross income. Corporations may deduct all contributions to 501(c)(3) organizations (regardless of foundation status) up to an amount normally equal to 10% of their taxable income.
Organizations that both perform a substantial amount of legislative lobbying on behalf of specific issues and primarily engage in social welfare activities may be classified under section 501(c)(4).
Non-profit organizations ruled tax exempt under section 501(c)(6) of the Internal Revenue Code include business leagues, chambers of commerce, trade associations, real estate boards, and boards of trade.
A separately created category for veterans' organizations is the 501(c)(19) classification.
General Tips on Deducting Contributions
1. Contributions are deductible for the year in which they are actually paid or delivered. Pledges are not deductible until the year in which they are paid.
2. The value of volunteer time or services to a charitable organization is not deductible. However, out-of-pocket expenses directly related to voluntary service are usually deductible.
3. Contributions for which the donor receives a gift or other kinds of benefits are deductible only to the extent that the donation exceeds the value of any benefit received by the donor. (See "When Goods and Services are Involved..."
below for details.)
4. Direct contributions to needy individuals are not deductible. Contributions must be made to qualified organizations in order to be tax deductible.
5. Contributions made directly to foreign organizations are not deductible, except in the case of some Canadian organizations as specified in an agreement with that country. Also, donations to charities located in Puerto Rico, the Virgin Islands, and other U.S. possessions are deductible. Such organizations must meet the requirements for exemption under the income tax laws of the United States.
6. The "fair market value" of goods donated to a thrift store is deductible as long as the store is operated by a charity. To determine fair market value, visit a thrift store and check the "going rate" for comparable items. One cannot take a deduction if the goods are sold on a consignment basis whereby the original owner gets a percentage of the final sales price.
7. Donated property may generally be deducted at the fair market value of the property at the time of the contribution. In certain situations, additional details concerning the property's worth may need to be filed with the IRS in order to make a deduction on your federal income tax forms. Also, gifts of appreciated property are subject to special rules.
8. PAS advises donors to seek professional advice or to consult the IRS when in doubt about the deductibility of contributions. The following IRS pamphlets, available through local IRS offices, also provide useful information.
Pub. 448: "Federal Estate and Gift Taxes"
Pub. 526: "Charitable Deductions"
Pub. 529: "Miscellaneous Deductions" (e.g., political contributions, labor union dues as an employee expense)
Pub. 535: "Business Expenses and Operating Losses"
Pub. 557: "Tax-Exempt Status for Your Organization"
Pub. 561: "Determining the Value of Donated Property"
Pub. 585: "Voluntary Tax Methods to Help Finance Political Campaigns"
Lobbying Restrictions for Tax Exempt Organizations
As long as 501(c)(4), 501(c)(6), or 501(c)(19) organizations are primarily involved with tax-exempt activities, they can engage in a substantial amount of lobbying. However, lobbying may not be a substantial part of the activities of a 501(c)(3) organization. As noted by the IRS, if a contribution to a 501(c)(3) is earmarked for lobbying efforts, it is not deductible as a charitable donation. Permissible levels of lobbying expenditures are clearly specified for 501(c)(3) groups that elect to come under the alternative lobbying criteria of the Tax Reform Act of 1976.
When Goods and Services are Involved...
A payment to a charity qualifies as a deductible gift only to the extent that it exceeds the fair market value of the privilege or benefit the "donor" receives in return for that gift. For example:
# One cannot deduct the full amount paid to a charity for such items as candy or magazines. If the charity charges $10 for a box of candy that normally sells for $8, only $2 can be claimed as a charitable contribution.
# The purchase price of tickets to a fund raising dinner, circus, or other meal or entertainment event is not fully deductible. Only the portion of the ticket price above the value of the meal or entertainment can be deducted for income tax purposes. The same rule applies even if, at the suggestion of the soliciting organization, the donor decides to let the charity give his or her tickets to underprivileged or disabled children.
Likewise, even if the charity refers to the entire purchase price as a "donation," the portion of the price that reflects the value of the admission is not deductible.
# Membership dues that merely cover the cost of privileges or benefits received by the "donor" are not deductible. However, "dues" that actually constitute a contribution for which the donor receives little or no privilege or benefit of monetary value in return are deductible.
# The price of participating in any raffle or similar drawing cannot be deducted as a charitable donation.
MPWCF warning: There are many charitable
organizations that use raffles or similar drawings to raise funds for charitable
purposes. However, their advertising that the costs of the tickets are
"tax-deductible" is, at best, misleading, and at worst, untrue.
While we do not profess to know Mexican or Canadian tax laws, we do know for an undisputed
fact that the USA tax regulations
specifically state that these payments are NOT tax-deductible on USA tax
returns. This is still true as of 12/19/2005.
Copyright 1987 Council of Better Business Bureaus, Inc.
note - nothing printed above has significantly changed since the above