Fundraising legal requirements are a complex but mission-critical part of running an effective nonprofit organization.
After all, federal and state-level regulations are what ultimately allow nonprofits to raise funds and reinvest their proceeds into their missions rather than losing a portion to taxes. Complying with these regulations shows the government (and donors) that your organization truly uses donations for their intended purposes and that you don’t abuse the goodwill of your generous supporters. Failing to comply with applicable fundraising requirements, even accidentally, can result in substantial penalties and the loss of your donors’ trust. It definitely pays to understand the fundraising legal landscape and seek help from professionals when needed.
For more than 30 years, the experts here at Labyrinth have worked with thousands of organizations to help them remain compliant with all state and federal fundraising legal requirements. We file tens of thousands of charity registrations each year, so we’re fully immersed in the world of fundraising law. We’ve rounded up the most essential regulations that every nonprofit operating in the United States should know. We’ll cover fundraising legal requirements that fall into these key categories:
Compliance starts with understanding the range of requirements that your nonprofit is held to. Starting with these essentials will set your organization up for continued success without the worry of legal penalties and fines slowing down your mission. With that foundation in place, you can then dig deeper into your unique regulatory context with confidence. Let’s get started.
Laws surrounding charitable solicitations give the government transparency into the fundraising activities of nonprofit organizations. These regulations are intended to protect donors and assure them that their gifts are going towards reputable organizations.
By securing 501(c)(3) status from the IRS, your nonprofit becomes a recognized fundraising organization at the federal level. However, charitable solicitations themselves are regulated at the state level. This means that you must register to fundraise in the state jurisdictions where your nonprofit actively solicits donations. This process is referred to as charitable solicitation registration or fundraising registration, and it’s typically handled through each state’s Attorney General or Secretary of State office.
Each state may require a different set of documents in order to register for charitable solicitations, but there are a few common pieces of documentation that you should be prepared to provide. These can include:
In addition to these common types of documentation required for state charity registration, you should also keep fees, penalties, and renewal requirements in mind. Initial filing fees vary by jurisdiction, and many states require renewal fees, as well. In most states, nonprofits must renew their charitable solicitation registration each year, although there are two exceptions that operate on longer timeframes and only require registration every two years. Penalties for failing to register or renewing past the relevant deadline can include late fees and, in some cases, civil or criminal charges. Explore our guide to charitable solicitation registration for a complete breakdown of these requirements and frequently asked questions about state registration.
Most states require registration before your organization can begin actively soliciting donations from their residents. A handful of states don’t require registration, but they might have varying requirements for different types of nonprofits, so always take the time to double-check. Our directory of state fundraising registration requirements rounds up the relevant requirements for each state, so we recommend using it to start your research.
The rise of the internet as a primary outlet for fundraising has created a new range of compliance challenges, so state registration requirements can also apply to online fundraising in different ways. With the ability to easily solicit donations from supporters across the country through donation pages, peer-to-peer campaigns, and email (more on this below), how do you know where to register your nonprofit in order to stay compliant?
Simply put, if you give residents of any US state the opportunity to donate to your nonprofit, you likely need to register to solicit donations in that state. Some states do explicitly require nonprofits to register if they accept donations from their residents online, but the regulatory landscape is extremely diverse. Most jurisdictions do not have specific laws pertaining to charity registration for online fundraising and instead group these activities under the broad category of solicitation through “other media.”
State-level laws and procedures for online fundraising regulation change constantly, so the safest choice is typically to register in all jurisdictions where registration requirements exist.
However, these filing expenses can easily become overwhelming for smaller organizations, so a more targeted approach may be necessary. In this case, some organizations choose to contain their risk by clearly stating on their main donation page or campaign donation pages which jurisdictions they can accept donations from. Additionally, peer-to-peer fundraising, in which your donors promote your campaign on your behalf, generally does not trigger a registration requirement, although the exact regulations can still vary by state. Always double-check your requirements or consult with compliance experts if you’re unsure of the exact specifications that you might be held to.
The biggest benefits of receiving official 501(c)(3) status from the IRS are tax exemptions for your nonprofit and the ability for your donors to deduct their contributions from their own taxes. For your donors to claim their contributions on their tax returns, your organization needs to be recognized as a qualified charity and actively maintain its 501(c)(3) status.
Even as tax laws evolve over time, nonprofits’ roles in the personal tax deduction process are limited. For instance, although the 2018 Tax Cuts and Jobs Act enables taxpayers to deduct more of their adjusted gross income through charitable donations, it does require that personal deductions be fully itemized. This has essentially reduced the number of taxpayers who are eligible for full personal deductions. Ultimately, donors and their tax advisers must navigate this process on their own. While you may not want to broadly announce to all of your donors that their gifts are tax-deductible (since this may not be true for every individual), you must still fulfill your nonprofit’s main responsibility—providing the proper documentation through donation receipts.
Donation receipts are documents provided to donors that verify their gifts made to recognized 501(c)(3) nonprofit organizations.
Donation receipts are technically not required for every gift that you receive. In the US, explicit written acknowledgments or receipts are only required for individual contributions over $250. However, it’s best practice to always provide donors with receipts or other written acknowledgments of their gifts regardless of the size of their donations. This simple act of recognition shows your gratitude, helps to build trust with your supporters, and demonstrates that your nonprofit has its act together.
What information should a receipt contain? A complete donation receipt should include these essentials:
Considering the value of building trust through acknowledgment and the ease of sending thank-you notes and receipts via email, there’s no reason not to provide the majority of your donors with donation receipts. Most donation software can send automated thank-you emails that double as donation receipts for online gifts. For donations received through non-digital means, your organization will need to devise a system for sending receipts manually via email or direct mail. For in-person or mailed cash donations, many organizations set a threshold amount (commonly around $20) above which they’ll provide written receipts to donors.
The primary purpose of receiving 501(c) status from the IRS is to be recognized as a tax-exempt organization by the federal government. While a broad range of organizations can be exempted from federal taxes, the vast majority of nonprofit organizations fall under the 501(c)(3) determination. This group includes public charities or private foundations whose stated missions revolve around one of these specific charitable purposes. Any profits generated by tax-exempt organizations must be reinvested or allocated towards their stated charitable purposes, and these organizations are also restricted from most forms of political and lobbying activities.
To receive tax-exempt status, a nonprofit must complete the application process, which can be broken down into these core steps:
Once approved, your organization should receive an IRS Letter of Determination certifying your tax-exempt, 501(c)(3) status. You’ll need to reference and reuse this document in a number of different contexts, most notably when registering to solicit donations in states that require it.
To maintain tax exemption, the majority of nonprofits will need to complete and submit IRS Form 990 or one of its variants each year. These publicly accessible documents give the IRS visibility into your nonprofit’s general financial activities. In them, you provide a description of your mission and purpose, top-level financial data from the past year, and your organization’s recent accomplishments. Failing to file your Form 990 on time or request an extension can result in hefty fines and potentially a loss of 501(c)(3) status, so it’s among the most important fundraising legal requirements to keep in mind. Labyrinth’s sister firm, Urich CPAs LLC, can handle all aspects of your Form 990 preparation to ensure complete compliance year after year.
Even with officially recognized 501(c)(3) status from the IRS, there are still some types of taxes that your nonprofit will need to pay. Unrelated business income taxes (UBIT) are levied on any revenue generated through activities that do not relate to your stated tax-exempt purposes. The IRS specifies that UBIT must be paid on revenue generated through activities that meet these three criteria:
Examples of activities subject to UBIT might include selling parking at your facility during unrelated events happening nearby or renting out space in your building to defray mortgage costs.
If any revenue that your nonprofit generates meets the IRS’s criteria, you’ll need to report it and pay UBIT appropriately, regardless of how that revenue was later allocated. There are a handful of UBIT exceptions to remember, though. Money raised through the sale of donated property, unpaid volunteer work, and convenience initiatives (for example, a school raising money for its cafeteria services) are common exceptions that don’t require your nonprofit to pay unrelated business income taxes.
It’s always important to keep accurate, ongoing financial records for your nonprofit, but especially so when it comes to UBIT compliance. If your nonprofit generates more than $1,000 in gross income from unrelated business activities, you’ll need to file Form 990-T in addition to your regular Form 990.
In most states, your nonprofit is automatically exempted from state income taxes once you receive official 501(c)(3) determination from the IRS. However, the regulatory landscape is quite diverse at the state level. Here are the top takeaways to remember:
State-level tax compliance can be more complex to navigate than the more straightforward federal exemption requirements. Consult with nonprofit CPAs, attorneys, or other compliance experts whenever you’re unsure of the particular tax requirements that apply to your organization.
Fundraising events are an important part of the strategies of many nonprofit organizations. They’re extremely valuable for generating donations, engaging donors, and raising your visibility in the community. However, fundraising events can open up a variety of new compliance questions that your nonprofit must consider.
The majority of these regulations apply to fundraising events that involve gambling-like “games of chance,” although there are other logistical considerations that may come into play, as well. Here are a few common event-related requirements to remember:
Additionally, remember that donors’ contributions during auctions, raffles, and other games of chance are not tax-deductible. Refer to this IRS explainer for a complete breakdown of federal-level regulations for these types of fundraising events. At the state and municipal level, it’s your organization’s responsibility to research the relevant requirements and obtain licenses as needed. Understanding these regulations far in advance will ensure you plan a fully compliant event and avoid wasting time and resources on events that aren’t legally feasible.
Email is one of the most convenient and efficient ways to connect with donors today. However, regulations around the use of email (and broader data and donor privacy concerns) have major ramifications for how nonprofits can and cannot use this tool to solicit donations.
There are three main pieces of legislation that your organization must keep in mind when engaging with donors through email:
Email has quickly become one of the most common fundraising methods for nonprofit organizations of all sizes. However, the constantly evolving state of digital privacy regulation means that nonprofits can’t simply use email and their donors’ personal data however they see fit. These three pieces of legislation are currently the farthest-reaching and most important to keep in mind, but stay on top of developments in the field. Consulting with nonprofit attorneys and web compliance experts will be your best bet if you’re ever unsure about exactly how regulations affect your nonprofit’s online fundraising and marketing strategies.
The world of fundraising legal requirements is complex and extremely diverse. It can certainly be a challenge to navigate it on your own, which is why the help of professional CPAs, attorneys, and compliance experts can be so beneficial for growing nonprofit organizations. However, starting with the essentials like the ones outlined in this guide is the first step towards understanding the exact requirements that your organization needs to adhere to.
And remember, the potential penalties and risks (to both your bottom line and reputation) of being non-compliant simply aren’t worth the time saved in the short run by neglecting or forgetting any of the elements discussed above.
The experts here at Labyrinth have helped countless nonprofits navigate a wide variety of compliance questions at both the federal and state levels. We can conduct the research, file the paperwork, and serve as your liaison so that your nonprofit can devote its time and attention to its mission, not on the logistical details of compliance. To keep learning about nonprofit legal requirements, we recommend these additional resources: