The Rule You May Not Be Following That Can Bite!

Yvonne Brownell, CPA, CMA, CGMA
Tax Shareholder

If you’re a tax exempt non-charitable organization such as a trade association, labor union, social club, or lobbying group, you probably think you don’t solicit contributions, right? Probably wrong! Do you solicit membership dues or seek sponsorships for your meetings or events? Then you probably need to include a statement on all such solicitations that payments are not tax deductible as charitable contributions. This rule applies if your organization normally has gross receipts of more than $100,000 in a taxable year and if you’re soliciting more than 10 people within the year.

The disclosure statement can be as simple as something like this:

Membership dues, contributions or gifts to (name of organization) are not tax deductible as charitable contributions for federal income tax purposes.  They may be deductible as ordinary and necessary business expenses.

If your organization lobbies, per IRC Sec. 6033(e), you also need to inform your members of the percentage of nondeductible dues.  In these cases, your disclosure statement may be something like:

Membership dues, contributions or gifts to (name of organization) are not tax deductible as charitable contributions for federal income tax purposes.  They may be deductible as ordinary and necessary business expense.  However, the deductibility of your membership dues is subject to the restrictions imposed as a result of (name of organization)’s lobbying activities as defined by the Budget Reconciliation Act of 1993.  (Name of organization) estimates that the nondeductible, lobbying portion of your 20__ dues is ____%.

The penalty for not providing this statement is steep – $1,000 for each day the failure occurred, up to a maximum penalty of $10,000 for a calendar year. There is a provision for waiving the penalty if you can show it was due to “reasonable cause”, but if you just didn’t want to bother, the penalty can actually be higher than the maximum amount.

How does the IRS find out, you ask? There’s a question on Form 990 (Part V, 6a), “Does the organization have annual gross receipts that are normally greater than $100,000 and did the organization solicit any contributions that were not deductible as charitable contributions?” And the next question goes into even more depth: “If ‘Yes’, did the organization include with every solicitation an express statement that such contributions or gifts were not tax deductible?” You want to be able to answer honestly.

If you have any questions, please contact us.