Although most charitable donors aren’t primarily motivated by potential tax breaks, they still need to know how donations affect their taxes. It’s important for your not-for-profit to educate them — particularly as tax laws change. For example, in 2020 and 2021, even nonitemizers were allowed to deduct up to $300 and itemizers could deduct cash gifts up to 100% of their adjusted gross income (AGI).

These breaks have lapsed and aren’t available for 2022, unless Congress acts. The following summarizes laws that continue to affect donors.

Cash and certain property donations

Generally, donors who itemize can deduct total cash contributions up to 60% of their AGI. To be deductible, cash gifts under $250 must be supported by a bank record (such as a canceled check or credit card statement) or receipt (such as a thank-you letter from your nonprofit showing the date and amount of the gift). Cash gifts of $250 or more must be substantiated by a contemporaneous written acknowledgment from your nonprofit.

Total donations of ordinary-income property usually are deductible up to 50% of the donor’s AGI but limited to the donor’s tax basis in the property (typically the purchase price). Property is ordinary-income property when donors would recognize ordinary income or short-term capital gains if they sold it at fair market value (FMV) on the date of donation. Examples include stocks and bonds held for one year or less.

Capital gains property

Donors of capital gains property usually can deduct the property’s FMV, but a lower AGI limit of 30% applies. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held more than one year. But in some circumstances, such as when the donation is intellectual property, only the donor’s tax basis of the property is deductible.

If your nonprofit uses tangible donated property for its tax-exempt purpose — for example, a museum displays a donated painting — the donor can deduct its fair market value. But if the property is put to an unrelated use (a hospital sells the donated painting), the deduction is limited to the donor’s basis in the property.

For donations of property, the substantiation requirements depend on the deductible value. If someone donates an item worth less than $250, a receipt is sufficient. However, for gifts:

• Of $250–$500 in value, the donor must have a contemporaneous written acknowledgment from your nonprofit.
• Of $501–$5,000 in value, the donor must also file Form 8283.
• Of more than $5,000 in value, the donor must also obtain a qualified appraisal.

In general, only donations of the full ownership interest in property are deductible. The right to use property usually is considered a contribution of less than the donor’s entire interest in the property.

What isn’t deductible

Finally, make sure donors understand they can’t claim a deduction for the donation of their professional services. Related out-of-pocket costs, such as supplies and miles driven, on the other hand, are deductible as charitable contributions. Contact us for tax advice if you’re working with a donor making a major gift or complicated donation.

© 2022

Your not-for-profit may not be required to undergo regular audits. But an audit can reassure donors and other stakeholders that you take seriously your responsibility. An audit can also help you identify risks before they become intractable problems. Here’s how to initiate and prepare for an audit.

Find and meet with an auditor

Start by drafting a request for proposal (RFP) for prospective auditors. The RFP should describe your organization, its programs, major funding sources and the type of service you need. Once you select an auditor, the firm will provide an engagement letter outlining the scope of services to be performed and assign responsibility for various tasks to your staff or the auditors.

The preaudit meeting with your auditors comes next. Finance staff and management should attend, as well as representatives from your board of directors or audit committee. Those involved will draw up a timeline for the work, and the auditors can answer any questions about the information they’ll need.

During this meeting, inform the auditors of any changes in your nonprofit’s activities since you first met. Also communicate new or eliminated programs, new grant reporting requirements, and changes to internal controls and staff.

Do your part

Collecting and organizing the documentation auditors need before they arrive saves them time and saves you money. Usually auditors will provide a list of documents — such as financial statements, accounting records, physical inventories and investment-related documents — and the date when each item is needed. Auditors also generally need organizational records such as:

• Articles of incorporation,
• Financial policies,
• Exemption letters,
• Board meeting minutes,
• Grant agreements,
• Pledges and other funding documents,
• Contracts, and
• Insurance policies.

You should gather support for footnote disclosures, as well. This includes documentation of significant estimates, pending litigation, restricted contributions and related-party transactions.

Head off issues

Don’t wait for auditors to find problems and ask questions. You can expedite the audit process and reduce costs when you identify and address issues before they’re raised by auditors.

For example, after making year-end closing entries, reconcile all your schedules and workpapers to the trial balance and review for obvious anomalies. Double-check manual journal entries, accrual calculations, entries that require estimates and in-kind donation valuations. Compare actual figures with budgeted ones and be ready to explain any significant variances.

No mandate?

Some nonprofits are required to conduct audits due to their large size (generally if they expend more than $750,000 a year). Grantmakers, banks and some states and municipalities may also require audited financial statements. But consider conducting regular audits, even if no mandate applies. Contact us for more information.

© 2022

Social media is an essential tool for not-for-profit outreach, engagement and fundraising. But social media also poses a reputational threat if your organization doesn’t clearly communicate rules for its use and prepare for “emergencies.” If you haven’t already, it’s time to implement some best practices.

Rules of the road

The line between employees’ personal and work lives was already blurry, and the shift to remote work has only exacerbated this effect. This raises the risk of inappropriate posts on personal and organizational accounts.

The best defense is a formal social media policy. The policy should set clear boundaries about the types of material that are and aren’t permissible on both kinds of accounts. For example, it should prohibit employees from posting nonpublic information they’ve learned on the job. Also share the policy with board members and volunteers and emphasize that they could possibly harm your organization with their personal accounts.

Around the clock attention

Social media is 24/7, and incidents can escalate quickly. So be sure to devote the necessary resources to monitor your accounts and others that refer to your nonprofit.

With organizational accounts, check the posts and comments. Both can go viral and create trouble. That said, don’t get drawn into an exchange with a troll who’s posting in bad faith and simply trying to stir things up. Give your staff guidelines to help them determine when to engage and when to let it go. You can establish a zero-tolerance policy for offensive comments or disable comments altogether.

Consider subscribing to a “social listening” tool, such as Sprout Social or Brandwatch, that will alert you when your nonprofit’s name is trending on social media. These tools help you follow what people are saying about your organization and respond to them directly when appropriate.

Ready to respond

Mistakes — or intentionally damaging posts — can occur despite comprehensive policies. Create a formal response plan so you’ll be able to weather such events. The plan should assign responsibilities and include contact information for several spokespersons. Identify a specific trigger when it’s time to involve the executive director and board and include a list of potential responses, such as issuing a press release or bringing in a crisis management expert.

After a situation has resolved, you’ll want to sit down and review your plan’s effectiveness. Ask what worked and what didn’t.

Avoiding mistakes

You’ve probably seen other organizations mishandle ill-advised posts and attacks from outsiders on social media. Take their experience as an object lesson and put policies in place to help prevent the same from happening to your nonprofit.

© 2021

According to a recent survey conducted by fundraising platform FrontStream, the vast majority (87%) of Americans say they’re donating to charity in 2021. And almost 20% claim they’re giving more this year than they did in 2020. However, remaining uncertainty surrounding COVID-19 and the economy is making fundraising challenging for many not-for-profits right now.

Social media and mobile apps have made asking for donations easier in some ways. However, one of the most effective strategies for raising money remains the personal appeal. Donors consistently are more likely to give if the request comes from a friend, colleague or family member who’s committed to your mission. Use this fact to put your nonprofit on stronger financial footing.

Board Members are Usually Best

All of your organization’s stakeholders can promote your nonprofit and request support from their contacts. But development staffers aside, board members generally make the most effective fundraisers because they’re knowledgeable about your organization, passionate about your mission and typically have a wide range of contacts in business and philanthropic circles.

You can support their efforts by making sure they have the proper information and training. Consider equipping them with a wish list of specific items or services your nonprofit needs. Keep in mind that not all of their friends or family members may be in a position to make a monetary donation. However, some people may be able to contribute goods (such as auction items) or in-kind services (such as website maintenance).

Effective Methods

When making a personal appeal to prospective donors, your board members should, when possible, meet in person. Letters and email can save time, but face-to-face appeals are more effective. This is especially true if your nonprofit offers donors something in exchange for their attention. For instance, they’re more likely to be swayed at an informal coffee hour or cocktail gathering (contingent, of course, on local COVID-19 threats and restrictions).

It’s also important for board members to humanize your cause. Say that your nonprofit raises money for cancer treatment. If board members have been affected by the disease, they might want to relate their personal experiences as a means of illustrating why they support your organization’s work.

Even when appealing to potential donors’ philanthropic instincts, it’s critical to mention other possible benefits. For example, if your nonprofit is trying to encourage business owners to buy ad space in your newsletter, board members could explain that your supporters are a desirable demographic, both in terms of spending power and an eagerness to “buy local.”

Work Every Channel

Although personal appeals are extremely effective, don’t dismiss any fundraising technique — particularly if it’s low- or no-cost and is easy to use, such as social media. The most successful nonprofits work every available channel to increase interest and donations. Contact us to discuss your fundraising challenges and goals.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

© 2021

Watch out, nonprofit trade associations! If your group is a 501(c)(6) organization, your activities could potentially threaten your tax-exempt status. To ensure you’re in compliance with IRS rules, you need to routinely review your member offerings and any business you might conduct.

Support Common Interests

Trade associations exist to promote their members’ common interests and improve business conditions or “one or more lines of interest.” Typically, associations get into trouble when they interpret terms such as “promote common interests” and “improve business conditions” too broadly. For example, they might provide customized sales training for only some of their members. But associations don’t qualify for tax-exempt status if they exist only to perform services for individual members.

Another potential violation is engaging in business that’s normally carried out on a for-profit basis. And groups that are primarily social or that exist to promote a hobby generally don’t qualify for 501(c)(6) status.

Don’t Favor Individual Members

To avoid IRS scrutiny, you must be able to differentiate between qualified and nonqualified activities. For example, you are generally allowed to:

• Attempt to influence legislation relating to the common business interests of your members,
• Test and certify products and establish industry standards,
• Publish statistics on industry conditions to promote your members’ line of business, and
• Research effective business practices to share with your members.

But you should limit activities if they benefit specific members rather than your industry or profession as a whole. These might include selling advertising in member publications; facilitating the purchase of supplies for members; and providing workers’ compensation insurance to members. Your association’s “primary purpose” is key. Most 501(c)(6) groups perform some activities that don’t primarily serve common interests. But these activities should be limited in scope and number.

Be Careful with Unrelated Business

Even when certain activities don’t threaten your exempt status, performing services for members can trigger unrelated business income tax (UBIT). Typically, members pay for such services directly, instead of through dues or other common assessments. Depending on the services your association provides and the revenues raised, additional reporting may be required and you may owe UBIT.

Stop and reassess if you’re performing more services, or more substantial ones, for individual members. Instead, you might want to consider forming a separate for-profit organization to offer those services.

Observing Limits

It’s not always easy to differentiate between acceptable and unacceptable association activities. To help you remain on the right side of the IRS and preserve your tax-exempt status, contact us with questions.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

© 2021