Rules for 501c3 Third-Party Fundraising

Philanthropy may take a number of forms: Some supporters donate money directly to their favorite charities, while others contribute their time through volunteer efforts. Still others become third-party fundraisers for their favorite nonprofit organization, semi-independently raising contributions through events or fund drives that benefit a qualifying 501c3 charity. Although the Internal Revenue Service examines these types of events to make sure they’re not a fraudulent donation, fundraisers should adhere to rules to ensure their event creates tax-deductible donations and doesn’t put their chosen charity’s nonprofit status at risk.

Although third-party fundraising events may take virtually any form their organizers can imagine, a few general rules apply to every situation. Donors — those involved in a third-party event — must actually make donations to the charity. Cash donations must not be exchanged for dividends or small services or items that serve as tokens of thanks rather than legitimate purchases. Events should be generally in support of the 501c3 organization’s agenda, and must legitimately produce more donations than the amount invested into organization and administration of the third-party event.

It’s the responsibility of a third-party fundraiser to notify donors about the amount they may claim as a charitable deduction for participating in the event. Donors may claim deductions equal to any cash contribution made directly to the 501c3 organization. If donors contribute in the form of purchasing a ticket to a gala or a dinner, they may only claim the amount in excess of the good’s fair-market value. For example, donors who purchase seats at a $500-per-plate benefit at a restaurant where meals typically cost diners $100 each, donors may only claim deductions of $400 for each meal. Organizers should tell attendees in advance the amount they may claim as a deduction at these events.

Organizers should keep detailed records of their expenses when organizing a benefit event; they may claim those expenses as donations, provided they don’t exceed the amount raised in the fundraising event. Organizers may only claim direct expenses necessary to hold the event, such as the cost of tent rental, meals or renting a band; incidental expenses, such as the cost of a lunch while planning the event, can’t be claimed. Organizations often prefer that hosts provide a lump-sum donation to the organization, which is then used to administer the event and is spent by the charity. This method simplifies the accounting process for both parties.

State laws vary significantly in regard to registration of third-party fundraising organizations. Although nine states don’t require organizations to notify the state of their actions and intentions to raise money for a 501c3 charity, other states require all third-party fundraisers to register; some don’t require private parties to register if they merely hold a small event. Of the states that require registration, all but Colorado, Florida and Oklahoma allow charitable soliciting organizations to register using the Unified Registration Statement.