Fundraising rules and regulations: What charity board members must know

Fundraising plays a crucial role in the success of charitable and nonprofit organisations, as many rely on it to operate and fulfill their missions. Without consistent fundraising efforts, sustaining programs and services would be challenging. However, fundraising activities can also have tax implications, making it essential for board members to be well-versed in the rules and regulations that govern them.

Let’s look at different considerations for board members, for the U.S. as well as some resources for the United Kingdom, Ireland and Australia.

Who oversees charity and nonprofit fundraising

In the United States, individual states govern and regulate nonprofit fundraising, while organisations are required to apply for tax-exempt status with the Internal Revenue Service (IRS). The IRS status is mandatory to ensure donees’ contributions are tax-deductible.

Different countries recognise and regulate mission-driven organisations using similar oversight:

• The Charity Commission registers and regulates charities in England and Wales.
• In Ireland, nonprofit fundraising activities are governed by section 14(1)(i) of the Charities Act 2009, which established a Charities Regulator to oversee organisations’ compliance. These guidelines cover areas such as donor communication, use of funds and the conduct of fundraisers.
• In Australia, not-for-profits must be registered with the Australian Charities and Not-for-profits Commission and be endorsed by the Australian Taxation Office to be income-tax exempt.

Nonprofit fundraising activities and means of solicitation

U.S. nonprofit tax laws allow for nearly all types of fundraising events unless they violate other laws. Depending on the types of activities it undertakes, a mission-driven organisation may have to consider tax implications. Here’s a partial list of common nonprofit fundraising activities:

• Dinners
• Dances and galas
• Door-to-door merchandise sales
• Concerts
• Carnivals
• Sporting events
• Auctions
• Pledge events
• Crowd-funding
• Patronage levels

For the most part, nonprofit boards can conduct fundraising by soliciting funds over the phone, in person, over the internet or via direct mail as long as they abide by fundraising rules and regulations. They can also solicit governmental and non-governmental grants.

(Read more about Fundraising regulations: What volunteer boards need to know.)

In Ireland, detailed guidance on the standards expected of fundraisers is provided through fundraising codes. These resources aim to improve professional standards among fundraisers, ensuring that activities are conducted ethically and in line with best practices. More information on charity fundraising regulations and the responsibilities of trustees is available through the Guidelines for Charitable Organisations on Fundraising from the Public.

In Australia, fundraising activities are regulated at a state and territory level, and charities must comply with laws wherever they fundraise, not just where they operate. The U.K.’s fundraising regulator provides specific guidelines on types of fundraising activities.

When nonprofits pay tax

There are circumstances in which nonprofits may be subject to taxation. Whether that happens depends very much on the particular facts and circumstances of the fundraising activities.

In the United States, the legal standard for whether fundraising activities remain tax exempt is determined by whether they substantially further the exempt purpose of the organisation and whether funds collected are separate from funds that other activities generate.

Some types of activities are considered unrelated to a nonprofit’s tax-exempt purposes. Under certain circumstances, funds that are generated from fundraisers may be categorised as Unrelated Business Income (UBI). Nonprofit board members should be aware that UBI is taxable. The IRS offers information on UBI in Publication 598, Tax on Unrelated Business Income of Exempt Organizations.

To reduce any confusion around determining whether UBI is taxable, the IRS has established a three-part test for UBI. Under these circumstances, income could be taxable under UBI if:

1. The income comes from a trade or business (this generally refers to income-producing activities such as the sale of goods or services).
2. The income-producing trade or activity is something that stems from a continuously operated business, or at least one that operates frequently. Dances, bake sales and car washes aren’t considered regular businesses.
3. The trade or business doesn’t substantially relate to the organisation’s exempt purpose. The activity shouldn’t contribute in any significant way to the organisation’s exempt purpose. In considering how to assess UBI, boards should consider the size of the fundraising activities and their extent compared to the exempt function they serve. Activities that generate funds on a much larger scale than what serves the exempt purpose can be considered UBI and would then be taxable as income.

Tax laws do offer some exceptions for what is considered UBI, as follows:

• When all activities are conducted by volunteers.
• When activities are primarily carried on for the convenience of its members, such as transactions between a school cafeteria and the students and employees who eat there. The exclusion strictly pertains only to members, students, patients, officers and employees.
• When the profits from the sale of goods are all donated back to the organisation.

Nonprofit board members should also be aware of state laws that relate to solicitations and donations. Board members can find more information about fundraising rules and regulations at the National Association of State Charity Officials website.

In Ireland, registered charities are exempt from paying most taxes, including income tax, corporation and capital gains taxes, and stamp duty. However, organisations with employees pay income tax under the Pay As You Earn (PAYE) system and are not automatically exempt from value added tax (VAT), though they may find some breaks from VAT for their activities.

The UK government provides tax exemptions for fundraising events held by charities and other qualifying bodies. More guidance on these issues is provided by HM Revenue & Customs.

In Australia, certain taxes might apply to your organisation. These could include:

• Income tax. Some nonprofits have to pay it, while others are exempt.
• Goods and services tax (GST). If you fundraise, you might need to pay GST, though certain exemptions exist.
• Fringe benefits tax. Employers pay this on extra perks for employees, but it usually doesn’t apply to volunteers or contractors.

Fundraising rules and regulations related to deductible charitable contributions

When professional fundraising organisations may conduct a fundraising event on behalf of a charity, the charity must provide clear authorisation for the professional fundraising organisation to act as its agent in order for contributions to be tax deductible.

Although sponsorships fall under the category of a business deal, they’re usually not taxable because they’re usually only occasional events and they’re not connected with a regular business or trade.

In-kind donations are a type of donation where a group or individual donates an item or their time. In this case, when the donated item or time is valued at over $250, the charity should provide a written statement that describes the in-kind donation and its monetary value. The statement should also indicate that the organisation didn’t provide any goods or services, and if they did, the statement should describe those goods or services and provide a good faith estimate of their value.

As part of their compliance responsibilities, nonprofit boards must complete Part IV of IRS Form 8283 when they receive donations over $5,000.

Special rules for income generated by gaming activities

Many nonprofits are finding that gaming activities are a fun and entertaining way to generate funds for their charities. Activities such as bingo, raffles, poker tournaments and other gaming events often draw big crowds that generate large donations for a single event. Nonprofit boards should be aware of the circumstances that could result in wagering or excise taxes. IRS Publication 3079, entitled Tax-Exempt Organizations and Gaming, provides additional information on taxes and gaming.

The IRS also provides Form 990 and Form 990-EZ at their website for more information on professional fundraising services, fundraising events and gaming.

Using board management software to support nonprofit success

Charity and nonprofit boards need a reliable way to manage fundraising activities while staying compliant with regulations — no matter where they are. BoardEffect board management software offers a centralised location for the entire team’s work, streamlining collaboration, simplifying event planning and organising document storage, ensuring seamless execution of fundraising efforts that support the mission.

A nonprofit board has many responsibilities, including preserving the organisation’s tax-exempt status and ensuring compliance with fundraising regulations. Let BoardEffect help make these efforts easier, and see how Diligent can help.