As a nonprofit, the government says you are special.
You get a different status than other incorporated organizations as a nonprofit. Depending on your status as a 501(c), you don’t have to pay certain taxes. For example, a 501(c)3 organization only excuses your nonprofit from the Federal Income Tax. Despite your tax exempt status you still have to pay sales tax and use tax for applicable activities. In fact, because you are a nonprofit you have to adhere to a separate set of rules and laws governing fundraising, operations and finances.
Recently, I attended a seminar put on by students involved with the Entrepreneurship Clinic from the local law college. They explained some of the tax laws and methods to help keep more of the fundraising dollars in your pocket and tax-free. Below are several of the most relevant tips they shared.
Note that many of these laws are specific to our local jurisdiction. Please check with the local tax code in your state to see if you can benefit in the same manner. Also, you should pay your taxes.
Required vs. Free Will Donations
At many nonprofit events, whether it is a pancake feed or block party, they charge an admittance fee to attend and partake in the festivities. Even some people would consider these payments as donations to the nonprofit, but they are not donations because they are instead a payment for admission or service/good.
However, if you only have a free-will donation for admission or to cover costs, then that money is not taxable and is considered a donation. Because you are not requiring payment to attend and people can attend for free, it is not considered an admission to the event. But be careful with how you display the free-will donation collection. If you post a suggested donation amount, then that moves those payments back into the admittance column. Because you put a price on the admittance, it is no longer a donation and becomes taxable.
Several states also have special laws covering car washes. For example, in Idaho, money collected from car washes are not subject to sales tax. Again, these vary between jurisdictions so check with your state laws before your event so you know how tax laws apply to your fundraisers.
Tax at Auctions
Typically at big fundraising galas, several people will get into a bidding war over an item and end up paying way over the normal retail price. How do you calculate the sales tax you need to pay on those items? The key is to assign the sales tax on each item before the auction starts.
For example, you have a t-shirt from your nonprofit and you post a sign next to it indicating the normal retail value of $10 (plus the appropriate sales tax, which would be 70 cents at 7%). If the shirt then goes for $100 after the bidding, the only tax you owe is still 70 cents. The extra $90 is considered a donation and not taxable. However, if you had not posted the suggest retail value of the shirt, you would owe $7 on the $100 total sale. That $6.30 difference might not seem like a lot, but it can add up if your fundraiser is dealing with much higher priced items.
Many jurisdictions have special laws that require you to follow guidelines for certain types of fundraisers, including lotteries, raffles and bingo games. In Nebraska for example, organizations need to obtain a permit to operate a lottery (which gives out a cash prize) with ticket sales over $1,000 or a raffle (where tangible goods are the prize) with ticket sales over $5,000. Organizations hosting bingos also are required to obtain a separate license.
These activities also have specific requirements such as percentage paid out and other regulations in order to operate in accordance with the limits. It is possible to conduct a lottery or raffle without a permit, so check what the rules are before you dive in too deep. And as with any donations, you will need to know the requirements in providing donors with receipts.
These three points are just the tip of the iceberg on how local laws and taxes can affect your nonprofit. The most important takeaway is to do your research before you do any fundraising. Know what the local laws are and make them work for you. Doing so can make a big difference in how much of the donations your nonprofit takes home and the overall bottom line of your organization.