Accounting for nonprofits includes understanding the basics of charitable deductions. Many nonprofit organizations promote the fact that donations count towards charitable deductions on the donor’s income tax without truly understanding what this means and the ramification of such deductions. This primer will help you understand the basics of how charitable deductions work, the limitations on them, and what this means for your nonprofit organization.
Cash and Noncash Deductions
Both cash and noncash donations may qualify for deductions. Nonprofit donors can deduct the gift of money or the gift of an automobile, for example.
To be a valid tax deduction, however, your donation must contribute towards the overall good of the organization. It must also be a contribution to an eligible organization. An eligible organization is defined as any organization the IRS has recognized as a nonprofit. This may include a social, religious, medical, political, or other nonprofit organization.
Why People Donate – Financial Management for Nonprofits
Why people choose to donate to a nonprofit organization is an intensely personal decision. Many choose the nonprofit because of its mission; they believe in what the organization stands for or want to support its projects.
As part of accounting for nonprofits, however, the budget that you help prepare annually can be a powerful tool to support someone’s decision to donate or discourage them from donating. Building an effective budget that supports programs first and puts donations behind programs is an important step. Preparing an annual report that the general public can read and understand is also critical to help people choose your organization as the recipient of their donations.
Maximums for Charitable Deductions
Of course, you want to encourage people to donate as much as they can. But only a certain portion of their donation can count towards a charitable deduction. Charitable cash donations, for example, are limited to 30 – 50% of a patron’s gross annual salary, depending on the type of organization.
You should always provide donors with a receipt for their cash or noncash donation. Cash receipts can be for the face value of the donation, but noncash donations can sometimes be tricky to calculate. How much is a used living room set or a bag of clothing worth to a charity? Many charities can offer you a receipt with a set amount of the donation on it such as $25 for noncash items that are difficult to evaluate and estimate.
Generally, charities give receipts out for donations exceeding $250. However, most charities provide receipts for most donations, no matter how small the amount. Online giving makes it very easy for nonprofits to issue receipts automatically, which can then be printed by the donor and saved for tax purposes.
Affix a Value
Do you give items to donors as a thank you gift? For example, many nonprofits give tote bags away at events. Assigning a value to that tote bag helps recipients deduct the value of it from their charitable contribution. For example, if you give away a $5 value tote bag with every $50 donation, the charitable deduction is only valued at $45.
Although you can’t control how donors will ultimately prepare their taxes, by providing gift receipts, documenting thank-you gift costs, and preparing accurate budgets, you can encourage donations. Accounting for nonprofits isn’t only about numbers on a report; with the right accounting approach, you can help your nonprofit meet its mission goals.
Nonprofit Accounting with Beck & Company
Beck & Company is a Washington D.C. area nonprofit accounting firm with a team of expert auditors, accountants, and advisors available to help nonprofits of all sizes. We provide a variety of consulting, auditing, and accounting services and blend knowledge from the accounting and nonprofit worlds to help you improve operations and efficiency. For more information, please contact us at 703-834-0776 x 8001.