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Nonprofit Law/how to handle earmarked donations

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Question
I understand that if someone makes a "donation" to my charity (501c3), but it is earmarked (by the donor) for a specific individual, that this "donation" is now no longer tax-deductible. But how do we, the nonprofit, handle these donations/payments? As an example, if someone in our community lost their home to a fire, their friends would want to help this family out and would ask our non-profit to be the "middle-man" - collect the donations and then give them to the family. Is this an acceptable practice, as long as we tell the donors their "donation" is now no longer tax deductible? Should we handle the payment to the family any differently than our normal grants? Do we have to report this to the IRS? Also, processing these "donations" will cost us money - if they pay by credit card we will be charged a 3% service fee - can we deduct that from the "donation"? We have never allowed earmarked donations before - we've suggested that the donor instead make an unrestricted donation (we support lots of families in need in our community, but never at the request of a donor), but sometimes that annoys the donor, so perhaps we should accept earmarked "donations"?

Answer
I suggest that you do not want to engage in such activities. If you are still wanting to do it you may charge them a fee but may not give them donation receipts.

I think that you should inform the person that your organization operates and puts in its staff time solely on charitable works, which are eligible for donors to receive tax deductible donations.  I also suggest that you do not give them any tax advice as to their individual tax issues.  You can direct them, though to IRS Publication 526 "Charitable Donations" which is available at  http://www.irs.gov/pub/irs-pdf/p526.pdf

on page 6 where the IRS lists as not deductible "Contributions to individuals who are needy or worthy. This includes contributions to a qualified organization if you indicate that your contribution is
for a specific person."

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather more information.

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Harvey Mechanic

Expertise

I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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