Non-profit organizations are entities created for the sole purpose of providing social services to society. Unlike for-profit organizations, NPO’s don’t aim to maximize profits, however, that doesn’t mean they generate no profits.
It is a necessity for NPO’s to have additional funds to meet any unexpected expenses whatsoever.
Arranging fundraising events is an essential way of raising significant funds to meet aims set by the NPO. We know what fundraising events are so, what are fundraising expenses?
Fund Raising Expenses:
Just like a for-profit organization’s income statement, NPOs too prepare financial statements to report their income and expenses called a statement of activities.
Fundraising expenses is one of the classification of expenses reported on the statement of activities.
Fundraising expenses include all expenses related to the arrangement and execution of the fundraiser event. Following are a few examples of fundraising expenses:
- Fundraising mailings,
- Fundraising campaigns to publicize the event,
- Executive Director’s salary,
- Cost of preparing and distributing fundraising manuals, instructions, and other relevant material,
Since fundraising expenses arise due to special events, it also requires special reporting in tax forms and financial statements.
Non-profit organizations are exempt from paying income tax by obtaining the 501©3 status; hence, there is no debate whether fundraising expenses are deductible or not for NPOs since no tax is charged.
However, the fundraising expenses incurred shall be separately reported as a line item on the financial statements, as well as the IRS Forms filed by the NPO.
Tax Deduction for Donors:
As per the Tax Cuts and Jobs Act, the donors may be able to claim deductions on charities made in a fundraiser event depending on the type of event and donation made.
Donors can avail better tax breaks by strategically choosing their donation strategy. The tax law, in order to promote certain types of donations, allows a higher tax break on some donations than the others.
Hence, the donor can deduct the charity depending on the type of fundraising donation was made.
The donor can claim their charitable deductions on their individual tax returns i.e. the Form 1040.
Quid Pro Quo:
When a fundraising event like auction or dinner is arranged, it involves an exchange of goods. While the donor pays for the charity, it also receives benefits in exchange for the donation. This is referred to as “quid pro quo” in the IRS dictionary.
The non-profit organization should clearly state the fair value of benefits given to the donor on the receipt. This document shall be filed along with the income tax return by the donor to be able to claim the charitable deduction.
The maximum amount the donor will be able to claim from such donation is the difference between the purchase price and the fair value of goods received.
NPOs also arrange fundraiser events where funds are generated by selling gambling games like bingo, casino nights, and raffles.
As per IRS, this purchase of the game is in return for the chance to win a prize, and hence, the donation isn’t opined tax deductible for the donor by the IRS.
Funds generated by a NPO through fundraising events are exempt from tax, which is why any fundraising expenses incurred by the NPO aren’t of any concern to the NPO.
However, fundraising expenses such as a charitable donation made during a fundraiser event may or may not be tax-deductible for the donor, depending on the nature of the donation.