July 15, 2008
Create a Special Bank Account
To help keep accurate records of your earnings and expenditures, create a special bank account for your fundraiser. For tax purposes, you are required to keep the funds separate from anyone’s personal funds.
Your fundraising bank account can be in the name of the beneficiary, or you can give it a descriptive name related to the name of the fundraiser (Example: The John Smith Kidney Fund).
If you or your organization do not have an accountant on staff, it is a good idea to get an account manager at your bank. Ask your account manager what kind of services the bank offers for fundraising. It may be possible for people to make donations directly to the bank. You should also find out whether the bank has a web site that would allow people to donate to your account online using a credit or debit card. The bank is not only a great source of information on taxes, but it can make donating a lot easier by offering more donation options.
Types of Accounts
There are various types of bank accounts from which to choose. Your bank may recommend that you put the funds you raise into a trust account or other type of savings account. A trust account is an account controlled by a 3rd party (i.e. a bank) for the benefit of the account holder.
In almost all cases, you are not permitted to earn interest income on donated funds. This means that whatever kind of account your bank recommends, it must be non-interest-bearing. Most bank accounts (except “no-frills” checking accounts) have potential to earn interest. It is incumbent upon you to notify your bank of the nature of your fundraising activities, as well as your nonprofit status, to assure that interest is not automatically added to your account.
While You’re at the Bank…
While you are setting up your fundraising bank account, use the opportunity to get information from your bank. The bank will not only be aware of the federal laws mentioned here, but they can notify you of current state and local fundraising laws and taxes.
Be sure to ask your bank for information about your tax responsibilities. Even nonprofit organizations must keep close track of all donations, because the deduction amount available to donors depends on the cost of any goods they received. In other words, if a donor pays $150 for a fundraising product that is worth $50, then only the difference of $100 is deductible. Though they do not pay taxes on fundraising profits, nonprofit organizations are required to keep detailed records of all fundraising activities, including how the funds are spent. Additionally, as of 2007, the IRS is strictly enforcing the law requiring all fundraisers to notify donors of their nonprofit status.
As mentioned in Fundraising Tax Information, if donors claim tax deductions on non-tax-deductible donations, the fundraising entity can be held responsible for repaying those deductions plus penalties to the IRS. Unless you are fundraising on behalf of a nonprofit organization, or have partnered with a nonprofit organization, donations made to your fundraiser are not tax deductible for your donors.