Spring is in the air, and we all know that means youth sports are in full-swing! Whether you are a baseball or soccer parent, or you are planning for upcoming fall booster club activities, you are likely participating in some type of fundraising event. You should be aware that nonprofit 501(c)(3) organizations have to be careful to structure those events so that no part of the earnings benefit a private individual.
Let’s look at an example: one common fundraising technique is to provide each participating youth with a percentage of the funds they raise through product sales, either in cash or in a separate “account” that can be applied to fees, camps, etc. Although this may seem “fair” (after all, if your child puts in all the work, he/she should get all the benefits!), the funds retained by your child are providing a private benefit, and are not helping the organization as a whole.
One more example: participation in fundraising events earns each family “points”. Dues, program fees, etc. are at a reduced rate depending on the number of points earned. As with the above example, family #1 could pay the full amount of dues (let’s say $100), while family #2 could pay $50 because they did some fundraising for the organization and earned points. In this case, family #2 is receiving a direct private benefit that does not assist the nonprofit organization as a whole.
What’s the risk if your organization has fundraising activities similar to those described above? If the IRS determines the private benefit is substantial to the activity being conducted and not just merely incidental, the organization’s tax-exempt status could be revoked. In addition, if contributions received are not assisting the entire organization, they are not considered tax deductible by the donor.
Luckily, there are options! If you find yourself in this situation, consider the following:
- Funds raised can be split evenly among all team members, regardless of who “earned” the money.
- Team members can apply for funds based on financial need. The organization should have a formal application and decision-making process to ensure the funds are distributed to a charitable class of individuals (i.e. the poor or distressed).
- Funds raised can be applied to total costs of the team (e.g. direct purchase of uniforms, equipment, and tournament fees), thus reducing overall costs to each family.
- Funds can be given directly to families, with 1099s issued to report the compensation received. Each family would then have to report these amounts on their federal income tax returns.
- NOTE: some very popular SCRIP programs have been structured to avoid these issues – the funds raised actually belong to the families, not the organization, and are considered “rebates” rather than fundraising income. If you participate in these programs, make sure you understand how they are structured.
Remember you can’t force individuals to participate in fundraising events as a condition of benefiting from the group’s activities. Still have questions? Call any one of our tax-exempt specialists at 342-5630: Jean Smith, John Walker, or Traci Hanson.