Discussion:Taxation of Non Profits

The non profit will essentially take cash and non cash gifts, use some of the cash gifts for expenses relating to a party (the event where people will be giving the gifts) and then donating the remaining gifts to a 501(c)(3).

My question is if it does not yet have 501(c)(3) status are the gifts income? and are they then deducted as charitable deductions? Also, people are donating raffle items to the event. Those are meant to be given away at the event for the purchase of raffle tickets. I do NO corporate tax work, so I am not familiar with the rules, but are these "raffle donations" also income? And then would giving them away to people at the event be expenses?

Thanks for your help!

Cash and non-cash gifts received are recorded as contributions. Raffle ticket income would generally be special events income from gaming activities. Raffle prizes would be direct expenses related to special events. Be sure to track contributions separately from sales transactions.

The only trap would be if the IRS ends up denying the organization's application for tax-exempt status. In that case, the donations received were not tax deductible as charitable donations after all. That's the risk the donors take and the reason that most corporations and no private foundations will make a donation to a charity without verifying its tax-exempt status by asking to see its determination letter. It is proper to inform donors that the organization's tax-exempt status is "pending" or "applied for" when requesting donations.

Additionally, if they do NOT become 501(c)(3) (for whatever reason) within the 27 months, are the "gifts" of 1. the raffle items, and 2. the items eventually given to the charity - income to the non-profit?

Thanks again!

A 501(c)(3) organization is not required to apply for recognition of its tax-exempt status as long as its annual gross receipts are not normally greater than $5,000. See Reg 1.508-1(a)(3)(b): Exceptions to the notice (filing of form 1023) requirement: (b) Any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000.

In that case, as long as the organization actually qualifies, ie., the organization is organized and operated exclusively for one or more charitable purposes, no net earnings inure to the benefit of private persons, and the entity does not, except to an insubstantial degree, attempt to influence legislation or participate to any extent in a political campaign; then contributions are deductible as charitable contributions on the donor's return.

Reg. Sec. 1.508 contains the requirement that certain organizations must "give notice" (by filing Form 1023) to the IRS that they are claiming tax-exempt status under Section 501(c)(3). Those organizations have 27 months to do so. If the 1023 is filed late, and reasonable cause for late filing can be shown, the IRS will grant 501(c)(3) status retroactive to date of formation.

If the organization knew it was required to file, but did not, reasonable cause would not exist.

By the way, the IRS web site has quite a bit of published guidance on these types of questions: http://www.irs.gov/irm/part7/index.html

If the organization is required to apply and fails to do so within the 27 months and does not seek an extension based on reasonable cause, then it can most likely rely on claiming exemption under section 501(c)(4) as a social welfare organization. So its receipts would still not be taxable income. A 501(c)(4) organization is not technically required to file for recognition of its tax-exempt status (this, according to the law, however the IRS takes a different view). Donations to a 501(c)(4) organization are not tax deductible as charitable contributions. Additionally, a c4 will have to file a Form 990-EZ if its annual gross receipts are normally $25,000 or more and the IRS has said that it will not accept a 990 from an organization that has not applied for recognition of its exempt status.

If the organization has annual receipts of more than $5,000, it needs to apply, period (unless it meets other exceptions), and I see no reason why you should advise your friend otherwise. The best advice is "do it right, or don't do it."