Dear Nonprofiteer, Are voluntary Internet payments “contributions” for tax purposes?

Dear Nonprofiteer:

What rules govern the websites that provide a free useful service to people but also have a PayPal “donate” button on their page to keep the service free?

If that person’s PayPal is linked up to it, does that not mean that the donations (if any) cannot exceed the IRS annual exclusion amount of $13,000?  Or should that person try to register the Website as a non-profit?

Signed, Prepared to Pony Up But Puzzled

Dear Puzzled:

The Nonprofiteer was completely stymied by the legal and technical nature of your question.  Fortunately, she has a colleague in the Association of Consultants to Nonprofits whose knowledge of nonprofit law is encyclopedic.  Attorney Kathryn Vanden Berk kindly provided the following responses to your questions:

At first blush, I assumed that the Websites are 501(c)(3) entities, and that the advice is offered without charge — with the “ask” being a free-will tax-deductible donation.

However, I wonder if you’re talking about a for-profit entity that is asking for a free-will non-deductible “donation” in lieu of a charge.

In the first instance, there is no prohibition against an exempt organization (EO) giving advice or asking for donations.  It can even charge for the advice, as when Lumity requires payment for the book I wrote about how to start nonprofits in Illinois.  If it is asking for a free-will donation so that the service will remain free, then anyone can make up their own mind as to whether or not they want to click on the donate button. I used to use the Cornell University Law School LII (Legal Information Institute) to get into the IRS Code.  It would often put up a screen asking for donations for the site’s upkeep.  I just returned to their website and found that they still ask for donations.  You can see this at http://nimbus.law.cornell.edu/civicrm/civicrm/contribute/transact?id=6

In the second instance, a person may request a “donation” so long as they don’t hold themselves out to be a 501 (c)(3) charity, and/or claim that the “donation” is tax-deductible.  This might be a good way for some enterprising law firm to throw things out on the web to see if anyone finds it to be sufficiently useful that they are compelled by guilt (or appreciation or whatever) to pay for it.

If that person’s PayPal is linked up to it, does that not mean that the donations (if any) cannot exceed the IRS annual exclusion amount of $13,000?  Or should that person try to register the Website as a non-profit?

I’m not sure what you mean by this. The annual excludable amount for charitable contributions is related to one’s income, not to any arbitrary number.  Can you be more specific?  Are you talking about standard deductions?

The Nonprofiteer wonders whether the $13,000 cited by Puzzled refers to  the limit on tax-free gifts to individuals.  If so, then yes, gifts to a personal PayPal account must be counted toward that total.  If not, she urges Puzzled to clarify her question in the comments section below.

Whatever the circumstances, there’s no option simply to “register the Website as a nonprofit,” unless it actually IS a nonprofit, meaning an agency with a public purpose governed by a Board of Directors.  As in the case of “What about gifts to individuals?”, the Nonprofiteer stresses that nonprofit status is not camouflage for other economic arrangements; it’s an actual status requiring service to the community.

Many thanks to Ms. Vanden Berk for her expertise.  Input on these technical questions from other lawyers and IRS specialists gladly accepted!

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3 Responses to “Dear Nonprofiteer, Are voluntary Internet payments “contributions” for tax purposes?”

  1. Stuart Levine Says:

    Assume that I play a musical instrument. Rather than perform in a traditional venue where people purchase tickets to attend, I pick out a busy corner in the business district or at a subway stop. I have a real (as opposed to virtual) donation can next to me with a sign: “Donations accepted.”

    Is there any question but that, assuming that I’m not a 501(c)(3), the money in the donation can is subject to income tax and is not a gift. That has certainly been the rule for as long as I know of with respect to tips collected by waiters and waitresses in restaurants. See U.S. v. Fior D’Italia, Inc., 536 U.S. 238 (2002), where the employer had to pay FICA on tip income.

    • Nonprofiteer Says:

      Stuart, Excellent point. In other words, payment for services–however dressed up or flexible–is ordinary income, and people who want to treat it otherwise need to figure out how they can legitimately assume nonprofit status.

  2. Parisi Says:

    I agree with your point Stuart. Nonprofiteer thanks for sharing.

Comments are closed.


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