It’s Tax Season Again for Nonprofits

It’s tax season again, including for nonprofits. What does that mean for nonprofit executives?


Tax season means different things for different groups or people. For nonprofits and their executives, tax season means tax receipts for donations and form 990 time. The different more specific IRS codes for each individual nonprofit, combined with revenue, would call for different filing requirements. One can find more information on filing requirements for their specific charitable codes through the IRS (Internal Revenue Service) website. This article is focused more specifically on the tax receipt requirement for nonprofits and how nonprofit leaders can take advantage of that requirement for an initial, more intimate “touch” with their donors at the start of the year.

The 2017 Tax Act and Nonprofits

The most recent overhaul of the United States tax system changed the giving landscape in several ways. Charitable contributions by individuals have been decreasing since the 2017 Tax Cuts and Job Act and the changes to standard and itemized deductions. By lowering itemized deductions and increasing individual standard deductions, the tax act has decreased incentives to give, and more importantly the incentive to give year by year. As Philanthropy Journal predicted at the start of 2018;

“Doubling the standard deduction makes it much more likely that fewer people will itemize their deductions. Because a taxpayer must itemize deductions in order to obtain any income tax benefit by making a charitable contribution, a taxpayer not itemizing deductions receives no tax benefit from such a contribution. Capping the state and local tax deduction also makes it more likely that the standard deduction will be used. Even for those who will still itemize, the lower income tax rates reduces the value of the charitable deduction because with lower tax rates, less taxes are saved by taking a charitable deduction than before the Act.”

Now in 2020 we have more data to help us better understand the consequences from those changes. Giving USA broke down some of the 2018 numbers aiming to express some of the complexity exhibited in the current giving landscape. Charitable giving by individuals has indeed gone down. It appears that individuals are choosing the standard deduction rather than itemizing.

These changes to the giving landscape make it more important than ever for nonprofits, and their leaders, to engage their donors with their mission in a more personal way. The sooner, and more often, a nonprofit leader can find ways to connect with their donors, the better the donor retention rates. It will be vital in the coming years for nonprofits to communicate their mission as being more than a tax deduction.

Tax Receipt Basics

The requirements for tax receipts are simple enough. Nonprofit Expert takes a dive into tax receipt basics, requirements, and examples. Their article explains that the IRS doesn’t have a standard form or look or even a vehicle in which tax receipts or “written disclosures” must be given to a donor.Capturing key information about donor receipts in the fund accounting software for your nonprofit can be a game-changer at tax time. The information required for donations of $250 or more includes:

  • Name of the donor
  • The amount of money or a description of the item or items donated.
  • A statement indicating whether or not any goods or services were provided in return for the gift; receipts from religious organizations must include a statement indicating that “intangible religious benefits” were provided but they have no monetary value for tax purposes
  • A good-faith estimate of the value of goods or services provided; insubstantial values need not be recorded.

Acknowledgment of the gift is meant to be as soon as the gift has been made. If the gift or donation is pledged, best practice is to acknowledge the pledge and then send a receipt once the pledge has been paid or actualized. Both can be done by paper or digitally in your accounting software, but usually, it is best to acknowledge a pledge and payment digitally and more immediately. Aplos Software, for example, is a powerful fund accounting software that can automate much of this process, while sending a thank you email to your donor on your behalf. If a nonprofit deploys mailing campaigns or paper correspondence with donors, a paper thank you would be better served than paper tax receipts.

Some nonprofits double their acknowledgment of payment as the tax receipt. Others separate them out, perhaps with an additional thank you. A more formalized tax receipt separate of the acknowledgment of payment can be advantageous in many ways for nonprofits. One strategy in particular is to send thank you letters after payment that could be doubled as a tax receipt, but to also send a wholly separate tax receipt yearly to all donors. Groups like Donor Box recommend rolling out tax receipts at the end of year. However, the start of the year right as tax season starts could be more beneficial. Regardless of how your nonprofit prefers to handle receipts, they can be accounted for and tracked in a unique donor profile for each of your supporters with a nonprofit CRM. Having a simple but effective CRM (Constituent Relationship Management) system can provide seamless communication and accounting for their support, and provide a meaningful way to start the year off right with donors.

Donors must have written acknowledgment of their gift in order to claim any charitable deduction. Because of the tax changes, the donors that would use charitable deductions are typically giving enough to make itemizing worth it. These donors are worth the extra manpower to have separate tax receipts sent outside of the typical, “thank you for your payment. By the way, it’s tax deductible.”

An Early Donor Thank You

The start of the year comes with new fundraising goals and cultivation tactics for new asks. By starting the year off with a thank you cover letter and “tax receipt” attached, a nonprofit has a viable reason to start communications early in the year with their donors. And, more importantly, this viable reason early in the year isn’t to ask for more money. It is easy to fall into the trap of setting donor communications in line with acquisition and stewardship cycles. This automation, while it makes sense in some ways, can contribute to donor fatigue if it seems as if the donor is only part of an organization’s automated system.

A nonprofit can start the year out by thanking, and therefore further noting, the previous year’s gift. And by making that thank you have a practical purpose, such making sure the donor has necessary paperwork to receive possible benefits from their gift, the donor doesn’t have to be wary of another ask coming their way at the start of the year.

 It also doesn’t hurt for a nonprofit to strategically place their name in donors’ minds during the start of the year. Using email templates that are part of an all-in-one platform to track these communications throughout the year can be an efficient way to stay connected and provide a personal touch

An Example in Donor Stewardship

Having a robust accounting system that can produce giving statements and receipts on demand will allow you to offer transparency and convenience your donors will definitely notice. Donors will appreciate not having to search their files or reach out for the tax receipt. Providing a way for donors to log in to see their giving history, set up recurring gifts, and manage their own giving is also helpful. The strategy is making it as easy as possible for donors to take advantage of every benefit charitable giving has to offer.

If crafted correctly, a thank you cover letter with tax receipt attached showcases your nonprofit’s donor stewardship. The message itself adds another layer of communications, exhibiting that nonprofit’s voice and individual branding outside of the usual, “this is our story”, “please donate”, and “thank you for your donation” messaging. The cover letter is a natural place for another chance to connect the donor to a nonprofit’s mission and work.

By employing donor centric strategies and earlier, different communications, a nonprofit can take advantage of an IRS requirement to connect their donors to their mission.