Fundraising Regulation for Nonprofits
Most charities rely upon the generosity of the public for their funding. Indeed, fundraising is a large part of a charity’s activities. Because of this, fundraising can be one of the biggest cost centers for a nonprofit; and fundraising is a highly regulated activity. Charities raise funds in a variety of ways, including in person, by telephone, direct mail, email, and through internet solicitations. They also sponsor fundraising events such as dinners, galas, door-to-door sales, concerts, carnivals, sports events, and auctions. Both state law and federal law apply to fundraising activities. For example, charitable bingos and raffles are regulated under state gaming laws, soliciting donations is regulated under various state fundraising laws, and the deductibility of donations for tax purposes is covered by both state and federal law.
State Gaming Laws
Raffles, bingo, and other gaming activities are popular fundraising tools. Although almost all states have outlawed gambling, many have exceptions in place for charitable fundraising purposes. State laws vary, so it is important to follow the rules applicable in the nonprofit’s state of incorporation, as well as the rules in every state in which the nonprofit wishes to conduct gaming activities.
Gambling laws are typically complex and often require the charity to have been in existence and continually operating in the state for a number of years prior to gaming. For example, in Arizona, a 501(c)(3) organization is authorized to conduct raffles if: (i) it has been in existence and continually operated in Arizona for at least one year; (ii) no agent or principal of the organization can receive a direct or indirect pecuniary benefit; and (iii) no person other than a bona fide local member of the 501(c)(3) participates in the management, sales, or operation of the raffle.
Gaming activities can be lucrative and generate goodwill for charities. But gaming laws are technical and sometimes confusing, making it important that charities fully understand their nuances to avoid criminal liability.
State Fundraising Registration
Nonprofits intending to solicit contributions/donations are almost always required to register with various states. Although state laws differ, the concept of soliciting normally requires a request – an ask – for a contribution. Therefore, if you don’t ask for contributions from anyone in the state and you don’t receive substantial or ongoing donations from donors in the state, you probably won’t have to register. The National Association of State Charity Officials has recommended in its Charleston Principles that charities that receive contributions over a “passive” website (i.e., where the charity is not attempting to drive traffic to the website by emails, letters, phone calls, advertising, or otherwise) should not be required to register merely because they receive a few contributions from the state; however, not all states follow this guideline. Each state has its own registration requirements, and most require yearly renewals. Remember, registration is a preliminary step to all fundraising activities in most states.
Deductibility of Donations
Under federal law in the US, taxpayers who donate to 501(c)(3) organizations may be eligible to receive a tax deduction for their gift. This means that the amount of money donated to a qualified charity can be deducted from the donor’s taxable income, reducing the amount of taxes owed.
To qualify for a tax deduction, the charitable organization must be recognized by the IRS as a 501(c)(3) organization. Additionally, the donation must be made in cash, check, or another monetary form, and the taxpayer must have a record of the donation, such as a receipt or bank statement.
In terms of state law, the rules for charitable deductions vary by state. Some states may offer additional deductions or have different rules for which organizations qualify. For example, Arizona offers a number of tax credits for gifts to certain types of charities. When a charitable gift qualifies for a state tax credit, it will not also qualify for a federal tax deduction. Taxpayers should check their state’s tax laws or consult with a tax professional to determine the rules for their state.
For taxpayers who itemize, it’s important to note that there are limits to how much they can deduct for charitable donations. The limit is generally 60% of your adjusted gross income for contributions to public charities and 30% for private foundations. Any contributions that exceed these limits can be carried over to future tax years. Taxpayers who do not itemize their deductions are limited to a charitable deduction of $300 per person.
While this post does not touch on every fundraising activity in the nonprofit’s toolbox, it does give an idea of the complicated fundraising compliance landscape for nonprofits. Other fundraising tools like media fundraising, cause-related marketing, and corporate co-ventures are subject to additional rules we have written about in the past. Always be sure to consult a lawyer or engage with a professional fundraiser to ensure compliance with the law.
Kyler Mejia is an attorney (bar pending) with Caritas Law Group, P.C. Caritas Law Group, P.C. Kyler advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide as well as donors with regard to major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.