You can ask yourself: Why do I have to donate to Musical Connections?

Donations to organization that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code. Here is some information about donations to 501(c) (3) organizations.

Who can donate to a 501(c) (3)?

Virtually any individual, and most business organizations.

Are these contributions tax deductible to the donor? What are the restrictions on such donations?

It depends. Although donations to organizations that are exempt under Section 501(c) (3) of the Internal Revenue Service (IRS) are potentially tax deductible to the donor, in the case of individuals, that person or couple must elect to itemize deductions on their annual tax return. If they do itemize, then such contributions are potentially tax deductible subject to IRS rules on contributions to charity, the nature of the donation, and so on. Here are some examples.

Example One: A Certified Public Accountant (CPA) supports the mission of an arts organization know as Wild Romanian Gypsies, and provides them with 8 hours of accounting services each month. His services are normally $150 per hour, so the value of the donation to the nonprofit is $1200 per month, or $14,400 per year. Because the accountant is a professional, he cannot deduct the value of his donated time on his own tax return, but the nonprofit arts organization can list it as an in-kind donation at the fair market value.

Example Two: A couple donates regularly to an animal rescue organization known as Benefiting Animal Rescue of Kansas (BARK). They elect to itemize deductions on their joint tax return, and because BARK is a qualifying tax-exempt organization, they can claim a deduction subject to the limits on such deductions on IRS Schedule A.

A nonprofit tax-exempt organization enters into a discussion with a businessman. He feels that he is paying too many taxes, and the nonprofit organization says: “Why don’t you donate to our charity, and reduce your tax bill?” Is this legal? How much can the businessman save?

Yes, businesses that file IRS Form 1120 can make donations to qualified charitable organizations, but the rules for businesses are different than those for individual taxpayers. Individual taxpayers can in certain cases deduct up to 50% of their adjusted gross income.

The limit for businesses is 10% of taxable income, but qualifying excess donations can be carried forward for up to 5 years. There are also a number of other restrictions and limitations related to business contributions to charity, so before claiming a deduction, the businessman should consult his accountant or tax advisor.

The discussion with the businessman above continues. The tax-exempt organizations decide it wants to use part of the businessman’s contribution to start another business. Some of the income from that business will go to the nonprofit, but some will become personal income for the organization’s founder. Is this permitted?

No. Funds donated to a tax-exempt nonprofit organization must be used for its exempt charitable purposes only. Section 501(c) (3) of the IRS states that “no part of the net earnings of which inures to the benefit of any shareholder or individual.” It would not be possible for the founder to convert any of the net earnings of his nonprofit organization for personal use.

What if the nonprofit owned the business? Would that allow the income to go to the founder?

Generally, no. A tax-exempt entity must conduct its business within the limits of the exempt purpose that was approved by the IRS at the time the organization applied for tax-exempt status. Although a nonprofit tax-exempt organization can conduct an unrelated activity, such activity would likely subject it to unrelated business income tax. I hope this information is useful.