501(c)(3) Donation Rules: Everything You Need to Know
501(c)(3) organizations drive a lot of the good in the world. But they don’t do it alone.
Your donors are the lifeblood of your business. Without them, 501(c)(3)s are at a distinct disadvantage. While it’s possible to rely solely on government funding and grants, donations from individuals are what really build momentum in the nonprofit world.
Using a donation management software to drive campaigns and track results is another commonality amongst the most effective 501(c)(3) organizations.
Of course, all the donations in the world may be lost if you don’t follow the rules. But don't worry, we have got your back and will break down all of the donation rules for your organization, so you can ensure that both your 501(c)(3) and its mission will thrive!
Here is what we will cover:
- 501(c)(3) Donations - An Overview
- Donations To 501(c)(3) Organizations
- Donating As a 501(c)(3) Organization
- Using The Right Tech To Get More Donations as a 501(c)(3)
501(c)(3) Donations - An Overview
Before getting into all of the ins and outs of 501(c)(3) donation rules and regulations, let’s take a moment to define what a 501(c)(3) organization is and what it does.
A 501(c)(3) is a type of non-profit organization that is exempt from federal income tax under section 501(c)(3) of the U.S. tax code. This group includes trusts, corporations, and charitable organizations. While there are other 501(c) organizations, 501(c)(3)s comprise 70% of them, making them by far the most common.
Bert is ready for a clear explanation on 501(c)(3) donation rules!
The 501(c)(3) exemption is meant to benefit entities that are run for charitable, religious, educational, scientific or literary purposes, or for the prevention of cruelty to children, women, or animals.
It is also applicable to entities that test for public safety, foundations for professional organizations, and organizations that promote amateur sports competition on a national or international level.
Donations given to a 501(c)(3) charity or organization are largely tax-deductible (fees for religious schools are an exception, as this money is given for services rendered). Because of these tax deductions, it is imperative for a charitable organization’s survival to retain their 501(c)(3) status.
Many donors, especially large donors or corporate donors, will not continue to donate to an organization if they don’t receive a tax deduction.
In the case of a 501(c)(3) organization, the bulk of your revenue must come from public donations, with a third coming from a range of different backgrounds and classes. While corporate donors and other 501(c)(3) donors are allowed, a majority of your time and resources should be spent on maximizing individual donations.
Pro Tip: Use a database to catalogue donors, keep a targeted campaign for sectors or individual donors based on their history, and offer simple and accessible campaign pushes across all online platforms.
Donations To 501(c)(3) Organizations
As you know, there are lots of rules regarding donations to your 501(c)(3).
Let's breakdown the most common questions we receive regarding donations and of course, the answers!
Can You Accept Donations Without 501(c)(3)?
A charitable organization is always able to solicit for public donations, but the caveat is that while you don’t need a 501(c)(3) tax exempt status to take donations, you DO need this for a donor to receive a tax deduction for their donation.
The truth of the matter is that many people prefer to donate to an entity that offers a tax deduction. This might stem from self-interest, sure, but more likely it’s because donors worry that an organization is not legitimate because it isn’t officially recognized.
David is confident that his organization is following all of the rules!
Those who want to solicit donations without going to the trouble of applying for 501(c)(3) status usually do so through crowdfunding initiatives, either privately with friends and family or through a service like GoFundMe.
Can I Donate To My Own 501(c)(3)?
Yes, you may make a tax-deductible donation to a 501(c)(3) charity no matter your association with it. As with any donation, be sure that you receive a signed receipt stating the value of the donation and the caveat that no goods or services were exchanged for the donation.
Can I Use Donations for Political Purposes?
This is another way that the 501(c)(3) distinguishes itself from other nonprofit entities. To receive 501(c)(3) status, a charity is not allowed to participate in lobbying activities. Political nonprofits exist, but they are classified differently than charitable nonprofits, often as a 501(c)(4).
Can Donors Give Restrictions on Their donations?
Yes! Donors can attach restrictions to the use of their donation by drafting a gift agreement letter. By accepting that donation, your organization is obligated to follow those restrictions. You can, of course, politely decline the gift entirely if the restriction is for something you don’t really need.
Donating As a 501(c)(3) Organization
Now let’s take a look at some regulations that pertain to how a 501(c)(3) uses their own money.
Donations for 501(c)(3) are held to certain guidelines, and it's good to be cognizant of what can and cannot be done with donated money, as mistakes (even innocently made) can lead to grave consequences: loss of trust from your donors, decreased donations, and even losing your 501(c)(3) status.
Can my 501(c)(3) Donate Money to Another 501(c)(3)?
The short answer is yes, a 501(c)(3) may donate to another 501(c)(3).
While you can donate to another 501(c)(3), note that your organization is responsible for any misuse of funds by the receiving structure. Be sure to do your due diligence to ensure that the recipient of your gift is a legitimate organization, with solid values that line up with your own.
Nina is happy that she can donate to another 501(c)(3)!
Pro Tip: Think hard about whether any of the donors to your own 501(c)(3) would disapprove of the use of funds by the receiving organization. This is a good faith action, to ensure that your transaction is truly representative of your organization’s goals.
This is also a matter of public perception for your nonprofit: if there is any hint of scandal, misuse, or wrong-doing on the receiving end, your own 501(c)(3) will suffer for it even if the mistake was innocent on your part. Be sure to do thorough due diligence on how your money will be used.
But what about donating to a different category of 501(c) organizations?
Can a 501(c)(3) Donate to a 501(c)(4)?
A 501(c)(4) is a nonprofit organization that is very similar to a 501(c)(3) in a few ways, but very different in others. The key difference to note is that, in contrast to 501(c)(3)s, 501(c)(4)s can, and do, donate to political causes and campaigns.
A 501(c)(3) may donate to a 501(c)(4) charity on a very restricted basis. Extreme caution must be used to ensure that the donation is going to an organization that is in line with your own statement of purpose.
This can be tricky, so we highly suggest that you talk to a lawyer before taking any action.
501(c)(4) organizations can legally be affiliated with political action and lobbying, and it’s possible that an innocent donation on your part may end up funneled into a political campaign of some sort, or used in a way that is not in line with your own organization's intent and mission standards.
A misstep in this process could result in losing your organization’s 501(c)(3) status.
Can a 501(c)(3) Donate to a Political Campaign?
This one is a hard no. Even lobbying, political action’s little brother, is extremely limited for a 501(c)(3) organization. Political activity is outright prohibited.
Anthony is learning so much about 501(c)(3) donation rules!
Even unrestricted donation to a 501(c)(4) that indirectly benefits a political organization can put your nonprofit at risk of falling afoul of the political restrictions in place. Engaging in any kind of political activity will put you at risk of losing 501(c)(3) tax exempt status.
Can a 501(c)(3) Donate to an Individual?
A 501(c)(3) charitable organization can certainly make grants and donations to benefit a "worthy individual" who falls under the purview of the organization’s mission statement.
Note that this does not mean you can run campaigns to help your friend Gary pay off his car. You would have to instead give funds to a class of people (those who are struggling to pay off their cars), not specifically Gary.
Giving funds to individuals as a 501(c)(3) can be made in the form of scholarships, covering medical costs for those who are in medical debt, feeding the hungry, or housing the homeless.
Using The Right Tech To Get More Donations as a 501(c)(3)
With the growth and affordability of technology these days, there is one key factor to help boost your donation fundraising capacities: a donation management software. Using a software can help you:
Streamline donation flow
Boost campaign conversion
Reduce labor costs for donation management
Minimize accounting mistakes
Look for a fundraising software with features like video and image optimized templates for campaigns, and customizable donor databases.
This modernization might just be what you need to bring your 501(c)(3) to the next level.
As always, if you are ever uncertain about a question of the ethics of any given donation, or if there is a question of what is appropriate in your own donations, consult your tax accountant for clarification.
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