Charitable Contributions, Pending Exemption and Deductability

July 21, 2008 2:45 PM

If you have filed for exemption with the IRS for a nonprofit you are starting and your status is pending while they review, I understand that you can still solicit donations and generally when your exemption is granted your exempt status applies retroactively to your date of incorporation. But how are the donor's charitable contributions treated? Can they deduct the tax year they donate or do they have to wait until the tax year in which exemption is granted (if the pending period lasts until a new tax year)? Or is it also retroactive and they would have to amend their previous tax return once the nonprofit gains exempt status?
posted by Falconetti to Law & Government (8 answers total)

At the risk of being That Guy... that really sounds like a question you should pose to a tax professional, not random people on the internet.
posted by meta_eli at 2:51 PM on July 21, 2008

True about the best person to speak with being a seasoned tax professional, but I figure this is something probably simple and straightforward that anyone who has spent time working in nonprofits would know about (I suppose we will see if that was a reasonable assumption). For the record, I am not involved with a nonprofit, I am just curious how this works.
posted by Falconetti at 2:56 PM on July 21, 2008

Don't mess this up. Your assumption of simplicity is unwise. Here in DC there is an umbrella organzation linking legal and other professionals with nonprofits. The work is free of charge. Check in your area.

Tax problems can screw you up faster than anyone else.
posted by Ironmouth at 4:14 PM on July 21, 2008

Have you received your "Advanced Ruling Period" letter, or have you only just submitted your paperwork?

IANAL, but I have worked with our attorneys on our own 501(c)3 submission (and approval). As explained to me, filing the initial form means nothing as far as your status is concerned. In fact, you may find yourself responding to several inquiries from the IRS as they process your paperwork.

What you're looking for is an IRS letter which may be referred to as the "Advanced Ruling Period" letter, which will have text similar to:
We have determined you are exempt from federal income tax under section 501(a) of the Internal Revenue Code as an organization described in section 501(c)(3)

Once our nonprofit received this letter we began solicitations as a tax-exempt organization. After our four-year ruling period, we submitted paperwork to gain our permanent "publicly supported organization" status. During this time our donors were able to deduct their charitable contributions. However, at least one of our potential grants were withdrawn because we had not emerged from our Advanced Ruling Period.

As Ironmouth and meta_eli wrote, consult a tax attorney. My experiences are anecdotal and for your general information only.
posted by F Mackenzie at 5:00 PM on July 21, 2008

Thanks for the advice on consulting a tax attorney (which is generally appropriate advice), but I am actually not involved in a nonprofit and am asking out of curiosity. Basically, I was asked to donate to a nonprofit that was currently pending exemption (it takes at least 4 months for the IRS to process a properly filed application for exemption). The charity expected to get an exemption before the end of the year, which would mean my contribution would be deductible in the same year that I made it (because the exemption applies retroactively as long as you file within a certain time after incorporation). But I wondered what would happen if they didn't receive their exemption until the next tax year; whether I would deduct the year they received exemption or whether it would apply retroactively to me (the person making the charitable contribution) as well. I'm not asking about whether they would become a public charity or a private foundation or whatever after the end of the four-year ruling period, which I don't think would affect me as a donor. Anyway, I appreciate the responses. BTW, I never donated.
posted by Falconetti at 6:49 PM on July 21, 2008

If they are not a tax exempt organization, you wouldn't be able to deduct it.
posted by toaster at 7:46 PM on July 21, 2008

I hate to keep barging into my questions, but I think I was unclear. toaster: I am talking about an organization which has applied for tax exempt status but whose application is pending. Organization can and do raise money during this time but you are right that it cannot be deducted yet. When the nonprofit gets exemption, it applies retroactively (usually), so that the charitable contributions they received up to that point becomes tax free. I wondered how it works for the person making the contribution.
posted by Falconetti at 6:04 AM on July 22, 2008

From IRS publication 4220:

Although donors have no assurance that contributions are tax-deductible for federal income tax purposes until the application is approved, contributions made while an application is ending would qualify if the application is approved. However, if the application is disallowed, contributions would not qualify.

What I surmise: since the IRS approval is retroactive, you can deduct your allowable contribution in the year made, as long as the organization eventually gets approval. You can always donate to an organization, but any deduction is in limbo until the IRS determination is made.

You can perform a search at the IRS site to see if an organization is eligible for tax-deductible contributions.

Note on my previous comment: the "Letter of Determination" is the term typically used for the approval letter from the IRS.
posted by F Mackenzie at 3:17 PM on July 22, 2008