Whether you’re a regular employee, a volunteer, or starting your own nonprofit, charitable work can be rewarding well beyond a paycheck. However, there are some misconceptions about the tax deductions available to those who assist nonprofits. Check out these things that you may or may not have known about your local (or national) nonprofit.
Volunteers can deduct expenses while volunteering
Nonprofits often rely on two forms of assistance: charitable contributions and volunteers. If you don’t have money to spare, volunteering is a great way to contribute to a nonprofit. As a volunteer, you can deduct travel expenses, clothing or uniform costs, and other out-of-pocket expenses.
Not all nonprofits are tax exempt
Nonprofits are all tax exempt, right? Actually, some organizations such as public schools and churches are not required to apply for tax-exempt status.
Not all tax-exempt organizations can receive tax-deductible contributions
Isn’t that confusing? Generally 501(c)(3) and private foundations can accept tax-deductible donations. However there are 30 different types of tax exempt status, and not all of them can receive tax-deductible contributions.
Employees and officers pay the same taxes as everyone else
Although volunteers are able to deduct their out-of-pocket expenses, regular employees are subject to the same taxes of employees of for-profit companies and not for profit organizations.
Not all financial donations are deductible
Charitable, financial gifts to 503(c)(3) organizations are often deductible, but it’s worth noting that not all donations can be claimed. Perhaps the most infamous example being lottery tickets: if you attend a fundraiser event for a nonprofit and purchase a lottery ticket or raffle ticket the cost of the ticket is not deductible.
Thinking about starting a Nonprofit? Know Your Orgs
Historically the 501(c)(3) was the standard for entrepreneurs who wanted to operate a business with a greater purpose than financial returns to investors. However there are more options available to entrepreneurs who want to give their work a social or environmental purpose. Here are a variety of other options for consideration.
Nonprofit
Simply put, a nonprofit is an organization from which those who run it cannot earn a profit. This is not to say that a nonprofit cannot earn a profit, however all profits must go back into the organization–there is no profit sharing among controlling members. 501(c)(3) status is often known as the “charitable tax exemption,” which allows exemption from federal corporation and income taxes on most types of revenue. Further, 501(c)(3) organizations are able to solicit tax deductible contributions and their volunteers are able to deduct their out-of-pocket expenses.
Not For Profit
Although you may often encounter this distinction, there’s no technical difference between the “not for profit” and “nonprofit” — the two are often used interchangeably. However the IRS has made one distinction: “not for profit” refers to an activity, in contrast to an organization established for purposes other than generation of profit. In sum, you cannot deduct expenses incurred in the pursuit of a not for profit activity.
B Corp (Social Action Corp)
Benefit Corporations are still a fairly new classification. B corps differ from regular corporations in that their investors and entrepreneurs are not committed solely to maximizing the profits of shareholders. Rather, B corps have a legal framework that requires the corporation to also account for environmental and social factors. B corps are not, as it may seem, a for-profit/nonprofit hybrid: a company still elects to be taxed as a C or S corp. B corp status only affects the requirements of corporate accountability, purpose, and transparency. That being said, it’s worth noting that B corps do not qualify for the tax deductions that are specific to nonprofits.
Image credit: Sue Thompson