Sunday, July 5, 2015

Raising money for those in need

If you are soliciting funds for the benefit of an individual (such as someone who has lost his home in a fire or has a serious illness and has incurred medical bills), you should be aware of when and how you may have to register and report your activities, and also be aware of some other rules that apply to fundraising activity.

In Michigan, the Charitable Organizations and Solicitations Act governs fundraising in general. It generally requires registration with the state to solicit contributions for a charitable purpose, but it makes an exception (MCL 400.273) for contributions intended for a particular individual if
  • The person to benefit is identified by name when the contribution is requested;
  • Only the actual and reasonable expenses for fundraising costs are deducted;
  • No fundraiser is paid in any manner for his services; and
  • The money is turned over to the person to benefit. 
If your activities meet these requirements, registration is not necessary. Be prepared to document compliance with the four requirements.

The money that is collected is not considered income to either the beneficiary or the fundraiser (assuming that it is turned over to the beneficiary). It is regarded as a gift from the original donor to the beneficiary, and gifts under $14,000 per year have no Federal tax-related requirements. The recipient does not have to report it as income, and the donor does not have to file a gift tax return. The contributions, however, are not tax-deductible by the donors. 

You may think of asking a church or another charitable organization make the request for contributions, since it is a tax-exempt organization. An organization that exists as a nonprofit corporation and is exempt from income tax under section 501-c-3 of the Internal Revenue Code, however, is not permitted to use any of its assets for the benefit of a particular individual. Mixing this kind of individual benefit donation with the charitable purposes of a church or nonprofit is not recommended, since that could jeopardize its own status as a qualified charitable organization.

Asking a church to use its premises for a benefit dinner or similar gathering is not problematic, so long as it is the organizer, and not the church, who receives the money and properly transmits it as required.

What about Federal requirements - reporting the collections to the IRS? Although charitable entities which qualify as 501-c-3 organizations are required to file informational returns with the IRS, even though they are not taxed on their receipts, the fact that donations to a fundraiser on behalf of a particular individual are legally characterized as gifts means that there is no obligation to file any return.

Importantly, those who are asked to contribute to such a fundraiser should be informed that their contributions are not eligible for any tax deduction.