How do nonprofits make money? Nonprofits conduct fundraising activities.
In order for donors to deduct their charitable contributions, the IRS guidelines require that the taxpayer donor show that the amount claimed as a deductible gift to charity is more than the fair market value of any benefit received. Moreover, it is important that the nonprofit corporation complies with disclosure, substantiation, and reporting requirements for the contributions it receives. The nonprofit must also comply with all State and local charitable solicitation laws and ordinances. For example, the Federal government requires the nonprofit to give a receipt to the donor making the charitable contribution. The receipt must be given before the earlier of when the donor’s income tax return is due or when the donor files the income tax return.
The receipt must contain the following information:
- Name of the donor;
- Date the contribution was made;
- Cash value of the contribution;
- Description (but not the value) of the contribution if in the form of property;
- Statement of whether the organization has or will provide any goods or services in return for the contribution; and
- Description and good faith estimate of the value of any goods or services provided or to be provided by the organization.
Furthermore, if the nonprofit will be utilizing the mail, the nonprofit should obtain a nonprofit mailing permit to use special bulk third-class postal rates.
Many times, the nonprofit may hire a commercial fundraiser or a fundraising counsel. These are both required to register with and are regulated by the Attorney General. Pursuant to California Government Code section 12599, a commercial fundraiser is an entity or an individual who is compensated to solicit funds for charitable purposes or is compensated to receive or control the funds. A fundraising counsel is a person who is compensated for planning, managing, or consulting on charitable solicitation within California.
A charitable organization is ultimately responsible for the control over its fundraising activities. A commercial fundraiser or fundraising counsel who is not registered with the Attorney General must not be employed by the organization. Proof of Registration with the Attorney General’s Office should be provided. The organization may request a fundraiser’s bond as security. Moreover, the organization must not raise funds for another charitable organization. This is required to register with the Attorney General unless such organization is legitimately registered.
Registration with the Attorney General’s Registry of Charitable Trusts serves to protect against fraud.
A commercial fundraiser must submit a $350.00 fee and obtain a $25,000.00 bond. The registration and bond must be renewed annually. A commercial fundraiser must also submit an annual financial report with the Attorney General which discloses the amount of funds obtained during the preceding year. Local cities and counties may also require the commercial fundraiser to register.
The charitable organization must comply with all county, city, and local ordinances regulating charity fundraising. To note, conducting a private lottery or raffle is illegal in California if it involves payment for a chance to win a prize. However, charity bingo and raffles are expressly permitted.
California law and local ordinances permit tax-exempt organizations to raise money from bingo if:
- Proceeds are used for charitable purposes;
- The game is operated by volunteers from the nonprofit organization;
- Proceeds cannot pay salaries;
- The bingo proceeds cannot be commingled with other funds;
- The nonprofit organization must obtain a license issued by the city or county; and
- The nonprofit organization must account for all proceeds to the local licensing authority. In addition, pursuant to California Penal Code section 326, et al., a nonprofit organization may lawfully conduct a raffle if ninety percent (90%) of the revenue is put toward the charitable purpose or program. Charity auctions are also permitted.
Moreover, the nonprofit corporation must comply with security laws by registering or qualifying for an exemption from registration for any debt instrument.
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