501(c)(3) Fundraising Guidelines: Nonprofit Donation Rules You Must Know

Fundraising for nonprofits can be tricky, and it's important to follow the rules and keep your tax-exempt status. Don’t worry, SSL Associates' nonprofit tax professionals are here to help you every step of the way. In this guide, we break down the key things you need to know about fundraising and donations for 501(c)(3) organizations.

How Can a 501(c)(3) Raise Money?

Nonprofit organizations must register with state authorities before soliciting donations. Regular nonprofit auditing and IRS reporting are crucial for maintaining tax-exempt status. While fundraising activities are generally tax-exempt, income from non-exempt purposes may be taxable.

As a best practice, organizations should engage qualified accounting professionals to ensure proper reporting and maintain their status. Ethical fundraising practices and transparent operations form the foundation of successful nonprofit management, and a professional can be invaluable in helping you achieve this.

Key Requirements for Achieving a 501(c)(3) Status

Tax-exempt organizations are public charities, private foundations, and private operating foundations. Public charitable organizations must demonstrate broad public support rather than relying on a single donor or group. This public support test helps ensure the organization serves community interests rather than private ones.

Eligible organizations typically work in:

• Charitable and educational initiatives
• Scientific research and advancement
• Literary and cultural development
• Religious activities
• Public safety programs, etc.

Here are some further requirements to keep in mind:

• Non-distribution constraint: None of your organization's earnings can benefit any private individual or shareholder. This means you can't distribute profits to individuals or use your funds for personal gain.
• Limited political activity: 501(c)(3) organizations are prohibited from participating in political campaigns or endorsing candidates. While you can engage in some lobbying and advocacy, it can't be a substantial part of your activities.

What Are the IRS Rules for 501(c)(3) Donations?

Let's dive into donation rules that every 501(c)(3) nonprofit needs to know.

1. Tax Benefits

The primary advantage of 501(c)(3) status is tax-deductible donations. Individual donors can typically deduct up to 50% of their adjusted gross income. Organizations must focus primarily on their exempt purposes to maintain this benefit, though some unrelated income is allowed.

If a 501(c)(3) organization earns more than $1,000 from a business activity that's regularly carried on and not substantially related to its exempt purpose, it pays the Unrelated Business Income Tax (UBIT). This ensures that nonprofits with these side businesses aren't given an unfair advantage over for-profit businesses doing the same thing.

2. Different Contribution Types

501(c)(3) organizations can accept both monetary and in-kind donations.

For non-cash donations, there are a few rules to keep in mind:

• Property donation requirements: Organizations must file Form 8282 when selling donated property within three years unless the value is under $500 or used for charitable purposes.
• Securities management: Stocks, bonds, and mutual funds often make attractive donations due to capital gains tax benefits. Keep in mind that additional documentation requirements apply.
• Vehicle donation protocols: The vehicle's use must align with your charitable mission. If the car's value exceeds $500, for example, a written acknowledgment is required from the donor.

3. Donor Documentation Requirements

For contributions that exceed $250, written acknowledgment is mandatory. Organizations must specify any goods or services provided in exchange for donations.

When issuing donation receipts, be sure to include:

• Organization's official name
• Contributing party's name
• Cash amount received
• Details of non-cash gifts (if applicable)
• Note of no benefits provided (if applicable)
• Value and type of benefits given
• Religious benefits statement (if applicable)

4. Valuation Standards

Fair market value (FMV) determines non-cash donation worth. Small nonprofits often struggle with:

• Time-intensive valuation processes
• Documentation requirements
• Disclosure obligations

5. Non-Qualifying Contributions

Certain donations don't qualify for tax deductions:

• Political contributions
• Individual-specific donations
• Membership dues
• Undocumented gifts

What Rules Does the IRS Have for 501(c)(3) Spending?

501(c)(3) organizations must follow specific rules about how they spend their donations.

1. Mission-Aligned Spending

Funds must support tax-exempt philanthropic purposes, and all expenses should directly connect to the organization's stated mission.

2. No Private Benefit

Assets and funds cannot benefit private individuals or stakeholders. The focus must remain on advancing charitable purposes.

3. Compensation Guidelines

While nonprofits can pay staff and cover operational costs, compensation must align with fair market value to avoid private benefit concerns. Organizations should research comparable positions, document compensation decisions, implement clear policies, review regularly, and consider total compensation packages.

4. Budget Allocation Rules

Program expenses should significantly outweigh administrative costs. The main focus needs to stay on charitable activities rather than overhead. Organizations should track expenses by category, monitor ratios regularly, document allocation methods, review efficiency metrics, adjust as needed, and report transparently.

5. Fundraising Expense Management

Organizations must justify fundraising costs and maintain detailed records of marketing expenses, event costs, campaign expenditures, and administrative overhead.

6. Compliance and Reporting

Despite tax-exempt status, organizations must file annual Form 990 reports with detailed financial information.

7. Grant Management

Organizations must adhere to grantor restrictions and requirements to maintain compliance.

8. Donation from One 501(c)(3) to Another

A 501(c)(3) organization is generally allowed to donate funds to another 501(c)(3) organization. This can be a one-time donation or a recurring contribution.

However, the donating organization needs to exercise due diligence and ensure that the recipient organization is using its funds appropriately. This is because if the funds are misused, the donating organization may be held accountable.

Before donating, the donating organization should consider several factors, such as:

• Potential conflicts of interest: Are there any potential conflicts of interest between the two organizations?
• Donor restrictions: Are there any restrictions on the use of the funds being donated?
• Financial implications: Will the donation negatively impact the donating organization's financial stability or ability to fulfill its mission?

Managing Fundraising Events

State regulations closely monitor fundraising activities, especially those involving chance-based events. Raffles, auctions, and gaming activities require particular attention since most jurisdictions mandate specific licenses. Organizations need to carefully consider potential tax implications, including both unrelated business income and requirements for tax withholding from winners.

State-Specific Requirements

Charitable gaming licenses are mandatory in 41 states and the District of Columbia. Organizations must also account for additional permits, such as those needed for serving alcohol. Certain jurisdictions require separate banking arrangements for gaming proceeds, while others impose specific excise taxes.

Special Tax Deduction Considerations

When participants receive goods or services at auctions or gaming events, their payments generally cannot be claimed as tax-deductible contributions. The IRS views these transactions as exchanges of equivalent value rather than pure charitable donations, regardless of the event's charitable purpose.

2025 IRS Inflation Adjustments for Donations in Fundraising Campaigns

The IRS has adjusted several thresholds for inflation.

Low-Cost Articles

For taxable years beginning in 2025, it isn't considered a regular business activity for tax purposes when a nonprofit sells small items like mugs or keychains for $13.60 or less.

Other Insubstantial Benefits

Donors can still deduct their full donation even if they get a small gift in return, as long as either:

• The gift is worth $13.60 or less (or the same amount as a "low-cost article"), for donations of $68 or more.
• The total value of all gifts is no more than 2% of the donation or $136, whichever is less.

Communication Regulations

Nonprofits using email must comply with the CAN-SPAM Act by obtaining proper consent and providing clear options to unsubscribe. This is especially applicable when selling products or working with corporate sponsors.

Additionally, General Data Protection Regulations (GDPR) compliance may be necessary even for U.S.-based organizations if they interact with European Union residents through their website or store their personal information.