When Are Donations to Nonprofits Tax Deductible?

If you run a non-profit organization, one of the most vital elements of your success is a steadfast group of individuals who are willing to donate to your cause. But if you are going to be asking other people and organizations to donate their hard-earned money, you are going to first need to be able to answer the questions that they might have.

One of the most common questions you will inevitably be asked is, “will my donation be tax-deductible?” Instead of losing a potential donor by telling them you are not sure, it is important to know what tax-deductible means, how you can procure tax-deductible status as an organization, and how you can use tax-deductibility as an effective marketing tool.

What does it mean for a donation to be tax-deductible?

When something is tax-deductible, this means that whatever the expense of such a thing may be, it will not be counted as taxable income. Essentially, the more tax-deductible donations you make in a given year, the less money you will end up having to pay to the federal government (though unfortunately you will still have less total money overall).

For example—and all of these numbers are strictly hypothetical—suppose you make $50,000 per year, you are in the 20% tax bracket, and you want to make a $10,000 donation to an organization. Normally, if you do nothing, you will owe the federal government $10,000 in taxes.

But, if you make a $10,000 tax-deductible donation to the government, you will only be taxed on the $40,000 you have remaining, and thus, you will only owe the federal government $8,000 instead of $10,000. Because the donation you made was tax-deductible, $2,000 that would have otherwise gone to the federal government can now be given to an organization of your choice.

What is the difference between a tax deduction and a tax credit?

Two things that can often cause confusion are tax deductions and tax credits. While a tax deduction (as explained above) reduces the amount of income that will be subject to taxation, a tax credit is something that reduces the amount of taxes you owe overall.

Suppose you have $50,000 in income, and—all else equal—will owe the federal government $10,000 in taxes. With a $10,000 tax deduction, you will still end up owing the federal government $8,000 in taxes. With a $10,000 tax credit, however, you will end up not owing the federal government anything at all.

Tax credits are much better than tax deductions, though tax deductions are much more common and easy to secure.

Tax credits are usually offered by the federal government when it is trying to encourage its citizens to participate in certain initiatives. Mathematically speaking, if you are an individual income-earner, you would much rather be eligible for a tax credit than a tax deduction. However, very few non-profit organizations can easily procure tax-credit status, and if you are running a non-profit organization, securing tax-deductible eligibility is probably going to be your best bet.

How do I know if a donation to my organization is tax-deductible?

Typically, in order for a donation to your organization to be tax-deductible, it will first need to have secured the status of being a 501 (c)(3) organization (though there are exceptions). In order to do this you need to begin by filing the proper paperwork with the IRS.

Being a 501 (c)(3) organization means that you are legally a ‘non-profit’ organization. The IRS generally uses the term non-profit to describe an organization or business whose operations are not for the purpose of enriching its shareholders.

In order to know if your organization is one that is indeed worthy of receiving any sort of “non-profit” designation, you should begin by asking yourself a few primary questions. What is our organization’s primary mission? What do we do with any excess revenues or funds? Who are really working for?

If your organization is one that seeks to serve others, rather than yourself, than you may indeed be a non-profit organization. There are number of different types of non-profit organizations out there, and consequently, there are a number of different ways you can secure the status of being an organization whose donations are tax-deductible.

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How can I utilize tax-deductibility as an effective marketing tool?

Securing the status of a non-profit organization is absolutely vital for any sort of long-term fundraising effort. When someone inevitably asks you “are donations to this organization tax-deductible?” you are absolutely going to want to be able to answer with an enthusiastic “Yes!”

Being able to claim your organization is tax-deductible will be beneficial for several different reasons. People will be able to give more than they otherwise would have, and they will also be more enthusiastic about giving in general.

When you are able to claim that your organization has earned the legal status of being a non-profit, people will see your organization as a legitimate group that seeks to serve a cause greater than its own enrichment. Furthermore, many people look for as many tax-deductions as they can possibly be receive, and this makes donating to your organization a much more tempting option.

A lot of people are skeptical of giving money to the government. Prove that your organization is capable of producing the greatest amount of good possible.

Though filing the necessary paperwork with the IRS can sometimes be a bit of a hassle, it is definitely worth it when it comes to securing non-profit status. As an organization whose donations are officially recognized as tax-deductible, you can expect more donations, more willing participants, and greater enthusiasm across the board

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