As the year winds down, the holiday season becomes a prime time for charitable giving, with donors feeling particularly motivated to contribute before the calendar flips. For charitable organizations, this surge in generosity is a golden opportunity—but it also comes with a host of compliance requirements. The compliance landscape of fundraising can be complex and overwhelming, especially during the busiest fundraising season, but we’re here to walk you through the essentials every charitable organization needs to navigate end-of-year fundraising with confidence.
Charitable Registrations
Before hitting 'send' on that fundraising email or setting up shop at a charity event, charitable organizations have one important step to take: making sure they are registered to solicit donations in the states where they fundraise. Approximately forty (40) states require charitable organizations to register before soliciting donations from their residents. The requirements differ by state, but generally all forms of revenue generation are considered the result of solicitation, and it is important to remember that registration is generally required before the solicitation and not simply once contributions are received. So, if your organization is asking for or receiving money from within a given state, you likely should be registered in that state. Some less obvious categories that may trigger a registration requirement are email solicitations, unsolicited donations, membership dues, program revenue from the sale of products or services, and internet donations. An organization that solicits via e-mail is treated the same as one that solicits via telephone or direct mail, if the organization knew or reasonably should have known that the recipient was a resident of or was physically located in that state. Organizations utilizing the internet to solicit contributions must register in the state which they are domiciled and in states where the organization specifically targets persons or receives contributions on a repeated and ongoing or substantial basis. It's not just good practice—it's the law, and failing to comply with these state-specific rules can result in penalties, fines, or even legal action, so it's crucial for charitable organizations to understand the nuances of state solicitation laws.
Substantiation of Contributions
Compliance continues even after the solicitation of donations. While generosity may be its own reward, for tax purposes, donors often need a little something extra—like a receipt. For a donor to claim a charitable deduction on their tax return, they must have a written acknowledgment from the organization for any contributions of $250 or more. Organizations should provide these documents, not just as a gesture of gratitude, but as a way to keep the IRS (and donors) happy. Most charitable organizations give donors a written acknowledgement at the time of the contribution or by January 31st of the following year. Organizations may give separate written acknowledgments for each single contribution or one written acknowledgment, such as an annual summary, to substantiate several single contributions. The written acknowledgement should contain the following information:
· The name of the organization;
· The amount of any monetary contribution;
· A description (but not the fair market value) of any contribution of property;
· A statement that no goods or services were provided by the organization in return for the contribution OR a description and good faith estimate of the fair market value of the goods or services provided by the organization in return for the contribution (see below – Quid Pro Quo Contributions); and
· The date of the contribution.
Quid Pro Quo Contributions
When a donor contributes in exchange for something from the organization, it’s not just a gift, it’s a quid pro quo contribution. And for charitable organizations, that means some more paperwork is in order to ensure everyone’s on the same page when it comes to tax deductions and transparency. If a contribution over $75 is given partly as a contribution and partly for goods and services provided by the organization (except for certain token items or membership benefits), the organization must provide a written disclosure statement to the donor. Note, however, that events such as raffles, casino nights, or auctions may be considered “games of chance,” which treat the income differently than charitable contributions. Organizations must give a disclosure statement in connection with either the solicitation or the receipt of a quid pro quo contribution (be careful, you cannot wait until January like you can for written acknowledgements!). The statement must be in writing, made in a manner that is likely to come to the donor’s attention, and include the following:
· A statement that the amount of the deductible amount of the contribution for federal income tax purposes is limited to the excess of money (and the fair market value of property other than money) contributed by the donor over the value of goods or services provided by the organization; and
· A good faith estimate of the fair market value of the goods or services.
Record Keeping
Effective record keeping is a cornerstone of nonprofit compliance, especially when it comes to tracking donations. Charitable organizations should retain records of all contributions received for at least three years. This includes receipts, acknowledgment letters, and any other documentation related to the contributions. Organizations need this information to separate program from non-program receipts, taxable from non-taxable income and to complete its annual return. Good practice includes maintaining a list of donors and grantors, with the date and amount of cash contributions or grants or a description of the noncash contributions received from each, as well as the donors’ states (for charitable registration purposes). By keeping thorough documentation, organizations protect themselves from potential audits, ensure donor trust, and make their annual reporting process smoother.
As the year comes to an end and charitable giving reaches its peak, it's essential for charitable organizations to ensure they are fully compliant with fundraising requirements. With the right preparation, charitable organizations can make the most of this giving season, raising crucial funds while staying on the right side of the law. So, as you gear up for another season of giving, take the time to review your compliance practices—it's the best way to ensure that your fundraising efforts are both successful and sustainable.
