July 25, 2023

Mastering Form 990: Unraveling the Complexities of Nonprofit Fundraising

By Christopher Granucci, CPA, Senior Manager, Tax & Business Services

Mastering Form 990: Unraveling the Complexities of Nonprofit Fundraising Nonprofit Tax Services

In nonprofit fundraising, distinguishing between various sources of revenue can be challenging, especially considering the IRS’s nuanced definitions. Grasping the intricacies of special events, gaming activities, and reporting obligations for Form 990 – the Return of Organization Exempt from Income Tax – is paramount for any organization striving to increase funds and further its exempt purpose.

Background on fundraising

From an organizational perspective, fundraising is frequently viewed as any undertaking that generates funds other than program service activity. It is often used to encompass just about any means of raising funds, from mailings to golf outings and anything in between. However, the IRS has a narrower definition of fundraising, which is limited to special events and gaming activities – all other revenues fall into separate income categories, such as program revenues, charitable contribution revenues, etc. It is important to understand this distinction to file an accurate Form 990, Return of Organization Exempt from Income Tax.

Fundraising rises to the level of a special event when it involves participation by donors beyond merely sending money because of charitable solicitation. An example of fundraising activity that is merely charitable solicitation would be sending out mailings asking for donations to support the organization. This is not considered a special event. “Participation by donors” generally involves donors receiving something of value in the process – known as a “return benefit.” A traditional example of this is a golf tournament. The donor pays the organization to play in the tournament, and in exchange, they get a round of golf, which has a retail value. More common since the COVID-19 pandemic has been virtual events. For example, a virtual talent show. Here, donors may not receive anything of retail value, but they still participate by watching the show via Zoom at a set date and time. If your organization is conducting a fundraising event, see the article Fundraising Event Reporting for Tax-Exempt Organizations to learn more about the ins and outs of completing Form 990, Schedule G.

The other type of activity reported as fundraising revenue to the IRS is gaming. Is your organization engaging in gaming activities as part of its efforts to raise funds? Conducting gaming activities such as bingo, raffles, and games of chance are popular methods of raising funds, but there are several potential issues related to this type of fundraising. Your state may have licensing requirements to be met to conduct gaming legally. Not all organizations are aware of such requirements. In addition, if regularly carried on, gaming activities can create unrelated business income for the organization. Gaming income is unrelated to an organization’s exempt purpose but, if not regularly occurring, will at least be excluded from unrelated business income. Once it becomes UBI, the organization may have to pay tax on the income, and there is a potential threat to the organization’s tax-exempt status if this makes up too large of a portion of the organization’s revenues. There are several rules surrounding gaming and exceptions, so it is a good idea to consult your accountant if you think you may be engaging in this type of fundraising.

Lastly, ensuring that your organization documents everything necessary to meet IRS reporting requirements when it comes time to file Form 990 is essential. Proper documentation includes clearly recording the overall cost of the event, the breakdown of those expenses (facilities, food & beverage, cash prizes, non-cash prizes, etc.), how much revenue was generated by the event, and what portion of that revenue is considered tax-deductible contributions by the donor. You may also be required to provide each donor a charitable acknowledgment letter, to let them know the breakout of the money they paid between tax-deductible philanthropic contributions and the value of goods and services they received. Make sure you know the requirements for providing charitable acknowledgment information to donors. Since events generating more than a certain amount of revenue are required to be reported on Form 990, Schedule G, it is important to separately track income and expenses attributable to each fundraising event conducted. The charitable acknowledgment process can help with this, as organizations will have the information to determine what portion of donor monies was given in exchange for goods or services received compared to the total amounts received. The excess of the donor’s payment over the retail value received is considered a charitable contribution by the donor. If your event is virtual, the entire amount of revenues received from donors may be considered charitable contributions. Still, it will be difficult to discern all this without clearly recording the information on the books.

Understanding what the IRS is looking for regarding reporting fundraising activities and utilizing the best practices for conducting such activities will make filing Form 990 less burdensome. If you are engaging in any fundraising and feel you would benefit from additional guidance, reach out to your team at Marcum for further assistance.