Understanding the New IRS Rules for Restricted Donations

Crowdfunding has become a popular way for nonprofit organizations and charitable-minded individuals to try and help those in need. Whether raising funds for a family who lost everything in a house fire or organizing a campaign to help fight disease, digital exposure helps boost fundraising. Recent changes in categorizing these funds have made the issue more complex.

The Basics of Crowdfunding

According to the IRS, crowdfunding is a way to raise funds online by asking for contributions from a large group of people for gifts, businesses, or charities. Often, one person will solicit on behalf of another person or entity, while some attempt to raise funds for themselves or their companies.

Restricted Versus Unrestricted Gifts

Under the IRS rules on restricted donations, there are several distinguishing characteristics.

Restricted donations are gifts where the donor has specified a purpose. For example, a donor can give monies and direct funding to a particular program or scholarship. Generally speaking, the receiving organization can’t allocate the funds elsewhere.

Plus, restricted gifts to qualifying nonprofits must meet specific requirements and time frames for deductibility. These deductibility requirements can be complex and depend on the donor’s stated restrictions.

Conversely, an unrestricted donation is one a receiving organization can use for any legitimate purpose. Typically, unrestricted gifts to qualifying nonprofits are donor-deductible with the proper documentation.

 

Changes in Taxation

The IRS has made several changes to amounts received by crowdfunding, reducing the tax-free threshold for receipts from $20,000 to $600.

For amounts received after December 31, 2021, crowdfunding beneficiaries may incur a federal tax liability if:

• They exceed the $600 threshold.
• Donors received goods or services in exchange for their contribution.
• Their employer made donations with company funds.

Beneficiaries who receive more than the established minimum may get a Form 1099-K from the crowdfunding website or the company processing the site’s payments. The taxability of crowdfunding donations can be complex because there are several exceptions under the Internal Revenue Code, and state and local laws may also apply.

To prevent any confusion, it’s best to work with an experienced organization like GiveSmart to fundraise. Organizations can report the funds raised through them directly, and donors handle the reporting of qualified donations they made.

What to Know

There are several things to keep in mind about crowdfunding donations, including:

• Crowdfunding donations aren’t always income: Some contributions fall under the IRS definition of a gift rather than income, which changes the taxability rules.
• Receipt of a 1099-K doesn’t automatically mean money is taxable: Beneficiaries should consult with a tax professional about their individual liability for claiming crowdfunding donations.
• Accurate recordkeeping is vital: Whether or not the monies are taxable, anyone who organizes crowdfunding campaigns or receives money from one should keep detailed records of their donations and what they did with the funds. 

Handle Your Donations With GiveSmart

GiveSmart simplifies the fundraising process with end-to-end campaign management services. Our experienced team provides leading technology for fundraising, on-site event assistance, and administration of online donation campaigns.

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