Contributions to nonprofits with 501(c)(3) tax-exempt status are tax deductible. This encourages people to donate money as well as goods and services. The fair market value of donated goods or services is also deductible.
If you provide goods or services in exchange for someone's contribution, that person can deduct only the amount of the payment that is more than the value of the goods or services received. If, for example, someone donates an item that is worth $50 to your auction and you sell it for $200, the buyer can deduct only the $150 difference between the amount he spent (the contribution) and the actual value of the item. If the value of the goods or services is greater than $75, your nonprofit organization must be ready to provide a statement to the contributor stating such information.
Should you receive a gift in kind, look for some third party to provide you with an approximate value of the item unless the donor provides you with an amount. You need to know the value of the gift for your own income records.
A 501(c)(3) qualified nonprofit organization is not allowed to be involved in politics, so steer clear. Political nonprofit groups operate separately from this classification. Organizations that either support or oppose political candidates may face an excise tax or may even risk losing their tax-exempt status. The Internal Revenue Service offers guidelines at
Pledges are a unique kind of contribution. In effect, a pledge is a promise (written or verbal) of a contribution to be given in the future. A pledge is usually monetary and may be based on an activity at your fundraising event, such as money pledged for each mile a participant at a walkathon completes. A pledge can also be a nonmonetary item.
According to the Financial Accounting Standards Board, a binding pledge should be entered as revenue — and this practice is especially pertinent at a time when nonprofits are expected to be accountable. There are times, however, when donors fail to honor a pledge. While some nonprofits choose to sue in those circumstances, others opt not to, fearing the move would portray the organization unfavorably. Most pledges are unconditional, but if there is a condition the organization must meet, such as matching a contribution, that is part of the binding agreement. Once the condition is met, the pledge becomes binding.
It is worth noting that pledges can present a misleading picture of your income, much in the way that technology and Internet stocks made a lot of people look wealthy on paper in the late 1990s. A total of $30,000 in outstanding pledges needs to be clearly differentiated from $30,000 in actual income for your organization. An organization that is frequently reporting far more money in pledges than it is seeing in income may look suspicious to the state charity commission.
Contributors can donate up to 50 percent of their annual gross income to qualified 501(c)(3) nonprofit organizations and be eligible for full tax deductions. There are some items that do not qualify for tax deductions. Raffle tickets, for example, are not considered tax deductible. A tax professional can help contributors determine the exceptions to the rule.