When you donate to a non-profit, be sure to stay on the IRS's good side. Deducting donations that seem to primarily benefit the donor can look like tax evasion.
Donating to a non-profit seems like a great idea and it almost always it. But sometimes, conflicts of interest can make donations unethical… or even illegal. The best way to avoid this from happening is to keep these charitable donation guidelines in mind and steer clear of potential conflicts of interest. The IRS in particular is always on the lookout for donation deductions used as tax-shelter strategies. This type of activity can not only have nasty repercussions for you as a tax-payer. It can also put the non-profit's tax-exempt status at risk – and hurt both your reputation and the organizations’.
What type of donations can cause trouble? The kind that seem to benefit you and your family members more than they do anyone else. For instance, let's say a nonprofit charges a $3,000 tuition. You donate $3,000 and the next thing you know your daughter gets a full ride. Looks pretty bad. If the IRS notices you deduct something like that from your income tax, they might investigate the transaction to see if it is tax-evasion. If you have been donating to the nonprofit for years and years, and the non-profit provides you or a family member a modest, one-time benefit, that’s one thing. It is also standard practice for a charity to provide a small token of thanks (a tote bag, a plaque on the well, etc.) But if the benefit of donating is substancial, tread lightly.
Non-profit insiders (executive directors and other employees, board members and other volunteers) can absolutely donate to their own non-profits. In general, when insiders support their own organization, it shows a vote of confidence for the non-profit and the work that it is doing. To make your donation seem credible, follow these tips:
- Have someone else write the receipt for the value of your donation
- When in doubt about the value of in-kind donations, consult a neutral third party
- Ear-mark donations for something that does not directly involve you; such as capital funds, an endowment, or programs outside your area.
- Don't donate money for expenses that directly benefit you, such as your payroll or travel expenses.
- Don't pad your salary, then turn around and donate the surplus. In fact, stay away from excess benefit transactions in general.
- Don't take donations from your non-profit then turn around and re-donate them.
In general, as long as you use common sense and have the best interests of everyone in mind, you shouldn't run afoul of any trouble when donating to charities. Remember that regardless of how noble your true intentions were, the appearance of impropriety can be enough for the IRS to take a closer look and for your actions to create negative press for the non-profit. When in doubt, be sure to consult a legal or tax professional about what the best course of action may be.
