New Year’s Resolution for Nonprofit Fundraising 101: Know the Law and Follow ItPDF
As the dust begins to settle after a flurry of development activity during the calendar year-end, now is the time to inventory your organization’s fundraising practices and procedures to ensure that they are not only compelling but also legally compliant. We have prepared this article so that you might better understand your organization's obligations under the myriad of state and federal rules when soliciting charitable contributions in the state of North Carolina and beyond.
First: Maintain a Solicitation License with the Appropriate State(s)
The state of North Carolina requires most charitable organizations to obtain and annually renew a solicitation license. Charitable organizations that raise less than $25,000 per year and do not pay compensation to officers, directors or professional fundraisers are not required to obtain a solicitation license in North Carolina; however, these organizations are required to apply for and annually renew an exemption. Certain religious institutions, schools, hospitals and hospital foundations are exempt from this registration and renewal requirement. If your organization has not obtained or failed to renew its license, voluntary compliance always is advisable. Don't wait for the secretary of state’s enforcement action to register!
Your organization also must carefully evaluate whether your development program requires solicitation licenses in other states. Your organization generally should register in any state (1) into which you send direct solicitations, whether by email or U.S. mail, and/or (2) from which you regularly receive contributions. Many ask whether accepting contributions on your website obligates your organization to register to solicit nationally. This area of the law remains somewhat unsettled, and some regulators have taken the position that solicitation of charitable contributions through an interactive website constitutes solicitation within all 50 states and the District of Columbia. One response to this ambiguity is to include a disclaimer on your website clearly stating that contributions only will be accepted from states in which the organization is registered or exempt from registration.
The National Association of State Charities Officials has issued the following nonbinding policy statement with regard to online solicitations: "Organizations that are domiciled within a state and use a website to solicit contributions must register with that state. Organizations located outside of a particular state must register if they use their website to specifically target people in that state, or receive contributions from the state on a repeated and ongoing basis or a substantial basis through its website." "Ongoing" and "substantial" are not specifically defined. Organizations should note that email solicitations directed to persons within a particular state likely automatically trigger that state's registration requirements, notwithstanding the more permissive NASCO guidance.
Second: Use Required Disclosure Statements When Soliciting Gifts
Both the state of North Carolina and the IRS require that specific disclosures be made to prospective donors when charitable organizations solicit contributions.
North Carolina requires licensed organizations to include on all solicitation materials its name, address and purposes for which contributions will be used. In addition, the following disclosure statement must appear on all fundraising materials distributed by licensed organizations: "Financial information about this organization and a copy of its license are available from the State Solicitation Licensing Section at (919) 807-2214. The license is not an endorsement by the State." This statement must be (1) in at least nine-point type, and (2) made conspicuous by being in bold, underlined or otherwise set apart from the other text.1
The IRS requires that when nonprofits solicit contributions of $75 or more for which valuable benefits are provided (as discussed below), the following disclosure statement must also be included on the solicitation materials: "The amount of the contribution which is deductible for federal income tax purposes is limited to the excess over the value of the goods or services provided by [insert name of organization]. The tax-deductible portion of your gift is $____."
Finally, nonprofits may wish to include the following general statement on fundraising materials: "[insert name of organization] is qualified as a charitable organization under Section 501(c)(3) of the Internal Revenue Code. Contributions to [insert name of organization] are tax-deductible to the extent permitted by law." It is important not to state that contributions are "fully" deductible, as various federal and state rules may limit individual donors' ability to claim tax deductions.
Third: Likewise, Use Required Disclosure Statements When Acknowledging Gifts
The IRS requires that nonprofit organizations provide donors with a timely written acknowledgement of contributions in two situations: (a) whenever a nonprofit receives contributions of $250 or more, and (b) when a nonprofit solicits or receives contributions of $75 or more in exchange for which it provides valuable goods and services. Note that the federal tax reform legislation enacted in December 2017 eliminated the charities' option to report donations to the IRS in lieu of providing an acknowledgement to the donor.
Also note that federal law requires donors to maintain a receipt from the donee organization or a bank record to claim a federal income tax charitable deduction for gifts of any amount.2 Accordingly, it is advisable for nonprofits to acknowledge each and every gift.
Of course, nonprofits also may wish to enclose a traditional "thank you" letter with the acknowledgment form or incorporate the information on the form into a traditional "thank you" letter. As you will see, the model acknowledgment form appended to this article is designed primarily to comply with federal tax rules; it neither expresses gratitude for the contribution nor explains in any detail the charitable purposes for which it will be used.
Acknowledgment of gifts of $250 or more
First, to receive a federal income tax charitable deduction for a contribution of $250 or more, a donor making a contribution must receive a "qualifying contemporaneous written substantiation" from the donee organization. The attached acknowledgment form may be used for this purpose. To satisfy the contemporaneousness requirement, the form must be received by the donor on or before the donor's tax filing deadline for the calendar year in which the contribution is made. This rule applies to individual contributions of $250 or more, inclusive of the deductible and nondeductible portions of the contribution. Multiple gifts of less than $250 made in a single taxable year by the same donor are not aggregated for purposes of this rule. As noted above, even though federal law does not require acknowledgement of gifts under $250, it is recommended that nonprofits send acknowledgements to all donors because receipts now generally are required to claim federal income tax deductions.
Acknowledgment of gifts of $75 or more in exchange for which benefits are provided
Second, a nonprofit must provide a donor with written acknowledgment of any contribution of $75 or more by virtue of which the donor is entitled to valuable goods or services provided by the nonprofit, whether or not the donor actually exercises his or her right to the benefit, unless the benefits are disclaimed by the donor in advance. The attached acknowledgment form may be used for this purpose as well. The acknowledgment form must include a good-faith estimate of the value of the goods or services provided to donors in exchange for the contribution. Please note that fair market value is not necessarily the cost to the nonprofit. For example, tickets to a fundraising dinner would be tax-deductible only to the extent that the cost of the ticket exceeds the fair market value of the meal and any other items provided to attendees, whether those items are purchased by or donated to the nonprofit. In general, any reasonable methodology for computing the fair market value is acceptable.
If benefits provided to the donor are insubstantial in value, the donee organization is not required to discount the deductible portion of the contribution. Goods and services provided in consideration of a contribution are deemed to be insubstantial if one of the two following criteria are satisfied: (a) de minimis benefits: the fair market value of the benefit provided to the donor is not more than 2 percent of the total amount of the gift, or $106, whichever is less, or (b) low-cost items: the amount contributed is $53 or more and the only benefits received in connection with the gift are token items that bear the organization's logo and have an aggregate cost of less than $10.60.3
Finally: Do Not Send Gift Receipts When Charity Raffle Tickets Are Purchased
Tax receipts should not be sent to individuals who purchase raffle tickets benefiting nonprofit organizations, regardless of whether the purchaser wins a prize. Raffle tickets are not deductible as charitable contributions for federal income tax purposes. The IRS has determined that purchasing the chance to win a prize has value that is essentially equal to the cost of the raffle ticket. Nonprofits conducting raffles should send Forms W2-G to the winners of prizes of $600 or more (if the value of the prize is 300 times the price of the ticket) indicating the fair market value of the prize, with copies to the IRS and the North Carolina Department of Revenue.4
Note: How to Complete the Acknowledgment Form
- The acknowledgment form includes a space for the description of any personal or real property contributed to the nonprofit. The nonprofit should provide a donor only with a literal description of the property. The nonprofit should not declare the fair market value of the donated property, which ultimately is the responsibility of the donor.
- The form includes a space for the description of goods or services provided by the nonprofit to the donor in consideration of the donor's contribution. In this case, the nonprofit must provide the donor with a good-faith estimate of the fair market value of the goods or services provided (so that amount may be subtracted from the total contribution to calculate the tax-deductible portion).
- If goods or services provided by the nonprofit are of insubstantial value (as defined in this article above), the nonprofit should include the following statement: "The estimated value of the item given is insubstantial, and the full amount of the donor's gift is tax-deductible to the extent permitted by law." This statement is critically important, as the courts have denied donor deductions because the nonprofit failed to include this information.
- Finally, the form includes a space for the signature of a representative of the nonprofit, which is optional.
- This disclosure statement also must appear on written acknowledgments of contributions sent to donors. Please note that the state may impose additional reporting and disclosure obligations on organizations that engage the services of a professional fundraising consultant or paid solicitor.
- Prior rules required only that the donor maintain a contemporaneous diary or log of charitable contributions under $250.
- These amounts are adjusted annually for inflation; the amounts included here are for the year 2018. The amounts for 2017 were: $10.70, $53.50 and $107.
- In North Carolina, nonprofit organizations may conduct only two raffles per 12-month period (except that statewide nonprofits may conduct up to two raffles per year on behalf of each of their local affiliates). In each calendar year, the fair market value of all raffle prizes offered by a nonprofit may not exceed $125,000 (provided, however, that if real estate is offered as a prize, its value may be up to $500,000). There are some limits on the use of the net proceeds from raffles (e.g., receipts less the cost of prizes): 90 percent of the net proceeds must be used for charitable purposes, and no proceeds may be used to pay any person to conduct the raffle or to rent a building where the raffle is conducted. Remember also that prizes with a net value in excess of $5,000 (i.e., the fair market value of the prize, less the price of the ticket) that is 300 times the price of the ticket are subject to tax withholding and, if the organization does not have the winner's Social Security number, backup tax withholding.