Tax & AccountingApril 29, 2021

How you go about fundraising can lead to different tax implications – stay informed to avoid surprises

Wolters Kluwer Tax & Accounting looks at various forms of fundraising and how their structure and who is raising and receiving the funds could affect how they are taxed.

What: Fundraising is not a new activity. Charities have been sending out fundraising solicitations for years. It’s also common for family, friends, and neighbors to help someone who is suddenly in financial difficulty due to a medical or other financial emergency. What is relatively new is the use of technology and fundraising internet sites such as Kickstarter and GoFundMe. Even sites such as Facebook are offering fundraising assistance. When recognized charities fundraise, the tax consequences are well established. However, when individuals start fundraising efforts, the purpose and structure of the fundraising and who is raising and receiving the funds can affect the tax treatment. 

Why: The tax impact of fundraising can be affected by whether the recipient is a business or an individual, the amount of funds that are raised, and whether anything is received in return by the persons contributing the funds. The following are some of the rules regarding the taxation of fundraising:

  • Fundraising for an individual in financial need is generally considered a gift by the contributor of the funds and not taxable to the recipient
  • There should be a clearly specified purpose for the funds such that the contributor can clearly understand the intended use of the funds
  • The organizer of the fundraising effort shouldn’t have control of the funds. Instead, they should use a bank account designated for the donation’s purpose or use an account of a fundraising facilitator
  • Gifts of more than $15,000 per year to any one individual would require the filing of a gift tax return and possible payment of a gift tax or utilization of part of the donor’s lifetime gift tax exclusion
  • Funds raised for a business that is not a recognized charity by the Internal Revenue Service (IRS) are usually taxable to the recipient business
  • The contributor of funds to a business may receive a reward from the business, such as a product or service, may receive an ownership interest in the business, or may receive nothing, each with potentially different tax consequences to the contributor
  • Contributions to a recognized charity may result in a tax deduction to the contributor for the charitable contribution
  • A Form 1099-K may be received by the organizer of the fundraising initiative and by the IRS from the fundraising facilitator if more than $20,000 is involved and there are more than 200 transactions during the year
  • The Form 1099-K does not necessarily indicate that the funds are taxable but may require an explanation on the tax return of the recipient of the Form 1099-K
  • The lack of a Form 1099-K does not necessarily indicate that the funds are not taxable; the amounts may simply be under the Form 1099-K reporting threshold
  • A professional tax expert can help address the potential tax issues involved in any particular fundraising situation

Who: Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help discuss the potential tax issues involved with various fundraising efforts. 

PLEASE NOTE: The content of this article is designed to provide accurate and authoritative information in regard to the subject matter covered. The information is provided with the understanding that Wolters Kluwer Tax & Accounting is not engaged in rendering legal, accounting, or other professional services.

Contact: To arrange an interview with Mark Luscombe or other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact Bart Lipinski.

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