Tax Deduction Rules

When you donate to a 501(c)(3) nonprofit organization, you’re eligible for tax deductions, but there are important guidelines to keep in mind. Here’s what you need to know:

  • Maximize Your Tax Benefits

    Public Charities: You can deduct up to 60% of adjusted gross income (AGI) for donations to public charities, with certain exceptions. The standard deduction limit is 30% or 50% for donations to private foundations.  

    Private Foundations: Donations to private foundations are also tax-deductible but may be subject to a lower limit (usually 30% or 50% of AGI). Special rules apply for operating and grant-making foundations.

  • Key Guidelines for Donors

    Eligible Donations: Donations to 501(c)(3) organizations are tax-deductible, but they cannot be used for political or lobbying activities.

    Nonprofit Restrictions: 501(c)(3) organizations must operate for public benefit—not for personal gain. Donors should ensure their contributions are used for the nonprofit's approved charitable purpose.

  • When 501(c)(3) Organizations Donate

    Internal Giving: 501(c)(3) organizations can donate to other qualifying nonprofits, but they must be careful that the donation is used for charitable purposes.

    Political Restrictions: A 501(c)(3) cannot make donations to political campaigns or use funds for political activities.

Understanding these rules ensures you can give—and receive—the full tax benefits of your charitable contributions. For more detailed guidance, consult a tax professional or explore IRS resources.

501(c)(3) Donation Rules

Know All Requirements and Best Practices

Individuals and companies that donate to a 501(c)(3) public charity can deduct up to 60% of their AGI. This is not the only rule and regulation the IRS has regarding 501(c)(3) donations. In this article, we’ll help clear up any questions you may have about donating to and from a 501(c)(3), along with exemption restrictions and passthrough donations.

READ THE ARTICLE

Nonprofits come with a lot of rules and regulations. Nonprofit leaders are expected to know all of them, but realistically, you may miss a lot. One area you cannot afford to misunderstand, though, is regarding donations. 501(c)(3) organizations need to be aware of 501(c)(3) donation rules to be able to accept donations and make donations to other organizations.

This article helps clear up questions you may have regarding donating to and from a 501(c)(3), along with exemption restrictions and passthrough donations.

There are currently 1.7 million active nonprofit organizations in the United States. Most nonprofit organizations are registered with the Internal Revenue Service (IRS) as 501(c)(3) organizations.

There are two types of 501(c)(3) organizations: public charities and private foundations.

Public charities must receive most of their revenue from public donations or government entities. These donations are tax-deductible. One-third of a public charity’s revenue must also come from various backgrounds and classes. That means they must solicit many individuals to remain tax-exempt.

Private foundations are often family-owned and face fewer restrictions than their counterparts, but donors to these foundations only receive a 30% deduction on their donations. Most of the revenue for these organizations comes from investments or endowments. The three different types of private foundations include:

Private operating foundations: Private operating foundations spend most of their resources on the active conduct of exempt activities. Unlike other private foundations, donors that give to these organizations can deduct up to 50% (60% until 2026 and 100% in 2020 and 2021) of their adjusted gross income (AGI). To qualify, private operating foundations must meet an income test and either the endowment, assets, or support test.

Exempt operating foundations: An exempt operating foundation must be a private operating foundation that has been publicly supported for at least ten years and has a governing body of fewer than broadly representing the general public. These organizations are exempt from paying taxes on net investment income and must obtain a letter of determination from the IRS to qualify.

Grant-making foundations: Grant-making foundations can be either private operating foundations or exempt operating foundations.

Starting a 501(c)(3) organization can be a complex and lengthy process that includes filing as a corporation with your state and applying for tax exemption from the IRS. Once you receive your exemption letter, several restrictions must be followed to remain tax-exempt.

1. Donating to a 501(c)(3)

As discussed, individuals and companies that donate to 501(c)(3) public charities can deduct their gifts up to 100% of their AGI (Adjusted Gross Income). Contributions to private foundations are also tax-deductible but generally capped at 30% or 50% of the AGI.

Many donors prefer to give to 501(c)(3) organizations because of tax deductions. 501c3 organizations need to get tax-exempt status to be able to offer their donors this option. Donations to 501(c)(3) nonprofits cannot be used in lobbying or political activities.

2. Donating as a 501(c)(3)

Some specific rules and regulations must be followed when it comes to 501(c)(3) organizations donating to other organizations. A 501(c)(3) organization can give to another nonprofit. An example of this is a private foundation providing funds to another 501(c)(3) charity. This contribution is commonplace, but before donating, it is vital to ensure your donors approve of the donation and that the other organization is free from scandal.

In addition to 501(c)(3) organizations, 501(c)(3) nonprofits can also donate to 501(c)(4) organizations. These contributions must be used for charitable purposes, and no amount can be used for political activities. When donating to a 501(c)(4) organization, it is essential to know how the gift is used. 501(c)(4) organizations do not have as many restrictions when it comes to politicalactivity. If your gift is used for any of these activities, you may be in danger of losing your tax-exempt status.

501(c)(3) organizations cannot donate to political campaigns.

501(c)(3) organizations can donate to individuals, but these contributions must be made as grants or scholarships. When offering financial support to an individual, a 501(c)(3) organization must award these gifts to a class of individuals and include an application process for those who would receive the gift.

A 501(c)(3) organization’s purpose must be charitable, educational, religious, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.

No individual or shareholder can receive substantial financial benefit from a 501(c)(3) organization. Nonprofits also cannot operate for the private interests of their founder, board members, or staff. If a 501(c)(3) organization is found to provide financial support to an individual with influence over the organization, they are in danger of receiving an excise tax and losing their tax-exempt status.

Additional restrictions on 501(c)(3) organizations are for political activities. 501c3 organizations cannot be action organizations. These organizations cannot spend a substantial amount of their time or resources influencing legislation. They also cannot participate in any partisan campaign activity for or against a candidate or party.