Donation Rules for Nonprofit Organizations
Posted on October 27, 2021
Nonprofits raise funds by receiving donations from individuals and corporate donors. If a donor is considering a contribution to a charity, he would like to ascertain that the nonprofit is authentic, and donations are being used as intended. Therefore, the nonprofit needs to evoke that trust among the donors.
Donors usually trust nonprofits that follow all the legalities and adhere to the rules set by the state and federal governments. Besides, if donating to nonprofits also offers tax benefits to donors, they are more inclined to contribute to the nonprofit.
Nonprofits that are legal and adhere to all the rules are considered 501(c)(3) nonprofits.
Nonprofits can accept donations according to the rules set forth by the IRS(Internal Revenue System) and the state where the nonprofit is established. Nonprofits can adhere to these rules and provide a system where donors get tax benefits while the nonprofits get the funds. It is recommended that nonprofits comply with all the laws that govern them to accept donations.
Donations to 501(c)(3) nonprofits are exempt from federal income tax under section 501(c)(3) of the US tax code. To qualify as a 501(c)(3) nonprofit, the source for the major chunk of the revenue must be public donations.
What are the Rules for Nonprofits to Accept Donations?
Gifts Must be for Nonprofit Purposes
A gift is something given without any compensation in return. However, if a donation is to a legitimate charity, the donor can get a tax rebate.
Gift Must be for a Valid Charitable Purpose
The IRS defines charities for religious, scientific, or community benefit as legitimate charities. A nonprofit can qualify to accept 501(c)(3) donations only if the contributions it receives are for religious, scientific, literary, or community benefits. Nonprofits that work towards the prevention of cruelty to women, children, or animals also qualify as 501(c)(3) nonprofits.
Gifts are Different from Unrelated Business Income
Unrelated business income is considered a business income rather than a gift or donation.
According to the tax code, an Unrelated Business Income is defined by the following rules:
- If the transaction is a trade or business.
- The income is ongoing and regular.
- If the income generated is not aligned with the charitable purpose of the nonprofit.
The intent of your business and the methods used for generating revenue for the charity are key factors that determine whether it is an unrelated business income or not.
Nonprofits Must Provide Written Acknowledgement for the Donations
All donations of $250 and above must be given a written acknowledgment to qualify as a gift and be deductible under the Internal Revenue Code.
The written acknowledgment must include:
- Name of the nonprofit.
- Amount donated/worth of goods donated.
- A statement of goods/services received in return for the donation.
Providing an acknowledgment for the donations received helps build trust among the donors. Besides it also helps donors claim tax benefits for their contribution to the charity.
All these rules are applicable for a nonprofit to qualify as a 501(c)(3) nonprofit. One may wonder if 501(c)(3) is a must or can a nonprofit accept donations without 501(c)(3)?
A nonprofit need not adhere to the 501(c)(3) rules for establishing itself. However, 501(c)(3) is important for donors. This is because when donors contribute to a 501(c)(3) nonprofit, they get a tax deduction for the donation. Besides, donors trust nonprofits with 501(c)(3) and deem them to be legitimate. Therefore, a 501(c)(3) nonprofit attracts more donors and retains donors as well.
There are several ways in which nonprofits receive donations. In recent years, online donations have become a preferred mode of donation for nonprofits.
Online Donations-An Overview
Online donations are when a non-profit raises funds through the internet. This is usually done through an online donation page of the nonprofit. Online giving has become a preferred mode of donations among donors because it offers convenience, speed, and a secure mode of payment. Besides, it facilitates fundraising through any location across the globe. Data reveals that online revenue increased by 23% in the last year. (Source: https://doublethedonation.com/tips/matching-grant-resources/nonprofit-fundraising-statistics/).
Recurring donations or online monthly giving is also easier with online methods. Online donations also support different fundraising options like mobile giving, peer-to-peer fundraising, etc.
Benefits of Online Donations to Nonprofits:
Nonprofits can Reach Donors across the Globe
With online donation options, a nonprofit can reach donors at different locations across the globe. As long the donors have internet access and a link to the website of the nonprofit, they can donate at a time of their convenience from anywhere.
Online Giving Offers Access to Donor Information
Online giving helps nonprofits get details like donor email addresses, billing addresses, and more.
Less Expensive than Other Methods
The cost of setting up the payment page and associated costs of maintaining it is minimal compared to all other types of donations.
Increases Visibility of the Website
Online donations increase the exposure of your website on the internet and drive more traffic to your website.
How Online Donations are Beneficial for Donors?
The internet is easily available to nearly everyone. As long as the donors can access the internet, all they need is a link to your website to make donations. They can make donations at any time convenient to them.
Secure Method of Donation
While contributing to a nonprofit, donors need to provide details about their identity and credit card details, etc. It can prove to be quite risky if this information falls into the wrong hands and is misused. However, online methods use security measures like PCI compliance, encryption, and more to ensure that the data is safe and secure.
Recurring Donations are Easy
Before the online donations, recurring donations were made through physical cheques sent monthly to nonprofits. However, online donations can be automated and monthly payments scheduled. Due to this reason, recurring online giving has become extremely popular, and online revenue has increased by 40% in the past year. (Source: https://doublethedonation.com/tips/matching-grant-resources/nonprofit-fundraising-statistics/)
The growing popularity of online giving has made online giving a must for 501(c)(3) nonprofits. Online donations are technology-driven and require a suitable platform to facilitate them.
There are several online tools available to set up a donation page online. Each tool has its specific set of features. A nonprofit organization needs to use the right technology to get more donations. The choice of technology will depend on the purpose of the nonprofit and the fundraising methods it uses.
Factors to Consider while Selecting a Tool for Online Donations:
- Price of the Tool: The cost of each tool varies. It is recommended that you stick to your budget, as far as possible, while selecting an online tool. However, make sure that the tool meets all the needs of the nonprofit.
- Ask your Donors: It is a good idea to take your donors into confidence and ask them which online tool they prefer. You can shortlist different online tools and survey to find out the preference of your donors and use this input to narrow down your search.
- Existing Technologies of the Nonprofit: In the tech age, your nonprofit must be using some technologies to support certain functions. It is recommended that you select an online donation tool that is aligned with the technologies currently in use. This will facilitate seamless integration of the tool.
- What do your Leaders say? In most cases, the leaders of the nonprofit are the final decision-makers. Hence, it is relevant that you consider the thoughts of your leaders regarding the selection of the tool before concluding.
- Setting up and Maintenance: An online tool may have all the features but may be difficult to set up or expensive/complicated to maintain. It is recommended that you select a tool that you can set up and maintain easily.
- Support: Check with the company providing the tool, whether they offer any kind of support for setting up and maintaining it. Some providers even train the internal teams of the nonprofit regarding the setup, running, and maintenance of the tool. Make sure that the online tool provider offers the kind of support you require for your nonprofit.
One of the best tools for online donations is iConnectx. This platform is customized for nonprofits and offers a host of features to support different fundraising methods. This software is reliable and easy to use. It offers all the features for end-to-end management for online donations.
If you are looking for the best online tool for your nonprofit, connect with the team at iConnectx!