Nonprofit leaders have a lot on their plates, from launching fundraisers to running programs with maximum mission impact. Amid all your responsibilities, your donors’ tax deductions likely aren’t top-of-mind. However, it’s worthwhile to brush up on charitable tax deductions so you can better understand and help donors give.

Tax breaks have always been a major motivator for donors, particularly those making large gifts. Keeping track of which benefits donors are eligible for and how they can claim them can quickly get complicated, especially when it comes to non-traditional gifts, like donations of stock and cryptocurrency.

To help your nonprofit understand tax benefits for a range of charitable donations, let’s dive into what makes a gift eligible for tax benefits and best practices for managing various donation types.

Eligibility

Not all donations are eligible for tax benefits, and documentation mistakes can make it impossible to properly report a donation to the IRS. To ensure your supporters’ gifts qualify for tax benefits and make it easy for donors to claim them, consider these eligibility factors:

  • 501(c)(3) status. Your nonprofit must maintain its 501(c)(3) status for both your organization and donors to receive tax benefits. Nonprofit accounting firm Jitasa explains nonprofits can do this by filing the appropriate Form 990 variant and completing any necessary state tax-exemption requirements. Some states will simply accept your nonprofit’s Form 990, but others have unique paperwork 501(c)(3)s operating in their state must file, like New York’s Form CHAR500.
  • Tax filings. Just like how nonprofits must file Form 990 every year, individuals reporting charitable contributions must file Form 1040 and itemize deductions on Schedule A.
  • Fair market value. When reporting donations, supporters must account for the fair market value (FMV) of any benefits they received in exchange for a donation. For example, say a supporter won a concert ticket at a charity auction. When reporting the contribution, the supporter must deduct the ticket’s FMV from the total amount they paid.
  • Donation receipt. To confirm a donation was made, supporters must have proof of the transaction. This usually takes the form of a donation receipt distributed by the nonprofit.

Ensure your nonprofit follows necessary requirements on its end, such as filing Form 990 and distributing accurate donation receipts. Additionally, being knowledgeable about the declaration process for donors can help you answer their questions, creating a more positive donor experience and increasing the chances they continue to give.

Types of Donations

Not all donations get reported in the same way. Each of these gift types has different reporting requirements and associated tax benefits for donors.

Cash Donations

Monetary donations are the most straightforward type of gift. However, the IRS puts limits on the benefits an individual can claim on their taxes to ensure they don’t end up deducting taxes for their entire annual income.

In general, the IRS allows individuals to use charitable contributions to deduct up to 50% of their adjusted gross income. However, organization type does matter here. Gifts to private foundations, veterans organizations, fraternities, and cemeteries are limited to 30% of adjusted gross income.

Additionally, if your nonprofit earns cash donations from any corporate giving programs, those businesses also need to report their contributions. Unlike individuals, businesses cannot deduct more than 10% of their gross income.

In-Kind Donations

Non-monetary contributions, such as gifts of products and services, can also be claimed for tax benefits.

However, judging the exact value of these in-kind donations can be difficult. For the sake of accurate reporting, the IRS asks donors to report their gifts’ fair market value, which it defines as “the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.”

In other words, FMV is the expected cost of purchasing a good or service under normal circumstances. Additionally, “donations of stock or other non-cash property are usually valued at the fair market value of the property.”

When it comes to stock donations, Infinite Giving provides advice on how nonprofits can accept these gifts and simplify the process for donors:

  • Set up a brokerage account. A brokerage account is where your stock donations will be stored. Consider partnering with a nonprofit investment advisor who can open a brokerage account for you, as they’ll be aware of your organization’s unique needs.
  • Share your stock donation link. Use a non-cash giving tool that integrates with your donation page to make donating stock to your nonprofit easy. Then, just share the link to your giving page so supporters can find it with ease when they’re ready to make a gift.
  • Send donors a receipt. There are a few unique stipulations for stock donation receipts since your nonprofit is likely unqualified to appraise a stock donation’s FMV. For instance, these receipts must include: the stock’s name, the number of shares donated, the date it was transferred to your nonprofit, and your nonprofit’s name.

When it comes to stock donations, consider using non-cash giving tools that automatically liquidate stocks and deposit received funds into your bank account. This enables you to earn usable funding from these gifts right away.

Donor Advised Fund Contributions

Donor advised funds (DAFs) are accounts that hold money for donors for the purpose of contributing to a charitable organization at a later date. While the fund holds donations, the sponsoring organization invests funds, allowing contributors to potentially grow their gifts over time.

Donors claim tax benefits when they give to a DAF, not when the funds are eventually distributed to a nonprofit. As such, when nonprofits accept gifts from DAFs, they should still document the process and provide a receipt, but the DAF sponsor is the organization responsible for helping individual donors claim tax benefits.

Cryptocurrency

Currently, cryptocurrency donations are still uncharted territory for many nonprofits, making the corresponding tax benefits and how to report crypto donations unclear for many. However, there are two important things donors should know about donating crypto:

  1. Capital gains taxes. When cryptocurrency holders cash out, they are subject to capital gains tax. However, if crypto is given to a nonprofit as crypto—as opposed to converting it to USD and making a cash donation—the donor does not have to pay capital gains tax and can receive a tax deduction.
  2. Crypto’s tax classification. As of the time of writing, the IRS classifies digital assets, such as virtual currencies, as property. This includes crypto, Stablecoins, and NFTs. While donors must complete unique documentation to report their digital assets, this designation means crypto is treated equivalently to in-kind donations when it comes to tax benefits.

To accept crypto donations responsibly, nonprofits should invest in a payment processing platform that can receive and convert crypto into USD. This ensures you have usable funds, and your team doesn’t need to navigate the crypto marketplace themselves.

Donation Receipts

To ensure all of your donors can claim their tax benefits, your nonprofit must provide donation receipts for gifts valued at $250 or more. However, it’s best practice to provide donation receipts to all donors. This helps maintain both your supporters’ and your nonprofit’s records, improving your financial management and preventing any surprises that might arise during an audit.

A donation receipt should include the following information:

  • The name of your nonprofit
  • For cash donations, the amount donated
  • For non-cash donations, a description of what was donated
  • A statement that no goods or services were provided in exchange for the donation
  • If anything was provided in return for the donation, a description of what goods or services were given and a good faith estimate of their value
  • For religious organizations, a statement if any goods or services were provided in exchange for the donation, they were intangible religious benefits

Donors must have a donation receipt to claim tax benefits, so be sure to send them out as soon as possible after receiving a donation.

Donors give for all sorts of reasons, but the potential tax benefits are a major one. By understanding what supporters have to gain by giving (particularly with high-capacity gifts such as stocks and crypto) and helping them claim these benefits, you can encourage more donations, improve the donor experience, and ensure your nonprofit follows all necessary financial regulations.