Tax-Deductible Charity Donations

A major milestone in any nonprofit is when you can encourage fundraising by offering donors tax-deductible charity donations. To do this, most organizations must obtain a determination letter from the IRS recognizing its tax-exempt status.

Not all tax-exempt organizations are eligible to receive tax-deductible contributions. For example, mutual self-help entities do not qualify. If you apply for tax-exemption under 501(c)(3), the IRS will respond to your application with a determination letter that states whether your organization is eligible to receive tax-deductible contributions.

Not all tax-exempt organizations must apply for tax-deductible recognition (in the form of a determination letter) from the IRS. Charitable organizations, credit counseling organizations, voluntary employees’ beneficiary associations, and supplemental unemployment benefit trusts must apply. For all other organizations, recognition from the IRS is optional but often sought. A determination letter comforts potential investors, grant-makers, and contributors.

How Do You Apply?

Remember that the IRS does not make the rules, only applies them. Their duty is to determine if your organization qualifies under the Internal Revenue Code (IRC) as a tax-exempt organization eligible to receive tax-deductible contributions. By applying for federal tax exemption (e.g. Form 1023, Form 1024), the IRS will let you know both if your organization is tax-exempt and, if so, if it qualifies to receive tax-deductible contributions.

Key Takeaways:

  1. 501(c)(3) organizations apply to receive tax-deductible contributions at the same time as they apply for federal income tax exemption using Form 1023.
  2. Receiving tax-deductible contributions is independent of 501(c)(3) or other tax exemption recognition.
  3. Nonprofits that may automatically receive tax-deductible contributions often still obtain a determination letter from the IRS to help with fundraising.
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