I’m the head of a student run school club at a university and I need help with handling IRS/tax issues.
Every year we ask local businesses to support our club (more specifically a large production stage show we put on) with donations to help with production costs. The question that always arises is whether it is tax deductible or not, and how to go about handling that.
Can someone elaborate on some points in the process of the donation for me. Background information:
Currently, my club has not applied for any exemptions or special status; only just recently applied for/received an employer identification number (EIN), which I guess is also a tax ID number. We do not make any profit and our budget always comes up near zero (sometimes a loss some years), and any extra is carried into the next year. Our officers are not paid anything or given any compensation. Its a basic student club where we fundraise or look for donations to help cover as much of the costs of our events, where money only flows in/out for events production costs.
After a donation is made, is the business allowed to write it off as a tax-deductible donation with the current state of things? If so (or if not), what exactly do I need to provide (or would need to provide) to the business for their accounting records?
Are there any details or information I need to know about handling tax deductions? I was hoping it was as simple as receiving it, providing some information to the business, and being done with things. If I need to submit IRS forms, which ones do I need to submit and what category does my organization fall under?
A business making a donation to you can always expense it. Your tax status should not be an issue. They can call it “advertising”.
An indivdual making a contribution can only deduct it if you are a charity. I’d assume your school is a non profit or governmental institution. Why not ask the accounting dept or school treasurer or development office?
For donors to your club to actually receive a tax deduction, your club must be recognized by the IRS as a non-profit organization of certain types (501c_). You have to fill out an extensive set of forms to apply for this, send them to the IRS, and wait anywhere from 6 months to 2 years. And you may be asked to supply additional details or evidence on specific questions.
If the IRS approves, they will send you a “determination letter” (because it says “we have determined you are exempt from Federal income tax…”). You have to keep this permanently in your records. You can hire an accountant type to do this for your group; they typically charge a few hundred to a thousand dollars. And you will have to spend a lot to time with them explaining things and providing documentation. With this letter, donations to your group are now tax-dedictable to the donor.
Then you will still have to file income tax forms (form 990) each year, unless your group is real small (your normal gross income is below $25,000/year).
It may not be worthwhile for a small club like yours to do this. If most of your donations come from businesses, they can just deduct it as advertising expense like jdc said.
One option might be to look into the official connection between your club and the university. There is an IRS option where you are declared a subsiduary of an already tax-exempt organization. (Like local chapters of the Red Cross, etc.) This takes less work with the IRS for this. (But it often requires much more entanglement with the ‘parent’ organization. They University may require that you not have your own checking account, but run everything thru their accounting system, for example. That may end up being more trouble than dealing with the IRS.)
So if the business were to write it off as an advertising expense, can you elaborate on the details how that works or what a business has to do (on its accounting end)? From my experience, not all managers are familar with how to do this, or may be reluctant to do so with any uncertainty of the process, so the more information I am equipped with, the easier it woudl be to work with.
I’m not a tax lawyer or CPA. For reliable advice, you’d need to see one of the two.
But in my (non-professional) experience, it goes something like this:
You, Andy, Judy and the gang decide to put on a show. You ask for the support of local merchants, who give you stuff. You prepare a program/playbill that you hand out to members of the audience, which has small advertisements from your
merchant supporters, which may be little more than a reproduction of a business card. They write off the donation as a business expense, just as they would in an ad in the local newspaper. Your status as a charity doesn’t enter into it.
Different story for indiviual donors who aren’t in business. People like that don’t get to write off expenses, mostly. Yes, there are exceptions, such as some mortgage interest, and some charitable contributions. Donations to your school may qualify, if the school has jumped through some IRS hoops. Donations directly to your drama club may not, because your club hasn’t jumped though the legal hoops, and it isn’t cost-effective to do so.