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Crowdsourced Fundraising

Parent Booster USA

Mar 08, 2023

Someone is going to get sued, but it probably won’t be you.

Crowdsourced fundraising platforms are popular these days. It’s easy to see why. Crowdsourcing offers high visibility and large user bases. With a little bit of know-how and luck, they can generate a lot of funding very quickly. There are, however, some problems with them, mostly due to the law not keeping up with technology. These points are worth knowing about, even if it is unlikely that any of them will truly bite you in the butt.

Problem #1: Tax Deductibility

One of the benefits of being a 501(c)(3) organization is that donations to you are tax deductible by the donor. This has caused a lot of confusion with online crowdfunding platforms like GoFundMe—I use them as an example purely because they have addressed this concern, which we’ll talk about later—as to whether or not the donation through that platform is still tax deductible.

What catches some people off guard is that the answer to that question is “generally no”. The way these platforms usually work is that they collect the money from potential donors and then give it to whoever is running the campaign when some threshold amount has been reached or some time has passed. The key is that the donor is not giving money directly to your organization—they are giving their money to the crowd fundraising platform, who then passes it on. The platform itself is usually not a 501(c)(3), so the donation is not tax deductible, even if the final recipient (your booster club) is a 501(c)(3).

Some platforms have tried to fix this problem. GoFundMe, for example, has a mechanism to establish that donations to you should be tax deductible. Once approved, they will collect the money through the PayPal Giving Fund, which is a charitable foundation. They then send the funds to the nonprofit running the campaign. Since the PayPal Giving Fund is a 501(c)(3), the donation stays tax deductible, even though it’s going through a third party. In short, there are ways to maintain the tax-deductible benefit for your donors when you use crowdfunding platforms, but they can be tricky to identify.

Problem #2: Who is the Donor, Anyway?

Crowdfunding platforms typically tell you who donated to the campaign and what amounts they gave. This is useful for handing out prizes and thank you letters, but as discussed above, you ultimately receive a single lump sum of money from the platform when the campaign ends, not the individual donations. This can be an issue because the IRS requires certain donor information to be reported on Schedule B of your 990 (unless you are filing a 990-N) for any donors who donated past a certain threshold ($5,000).

Are you supposed to track the donors individually? Or do you just write down the name of the fundraising platform in the schedule? Either option is a reasonable interpretation of the rules, and therein lies the problem: only one of the interpretations can be correct. Adding to the confusion, most people do not use their real names online. This would make accurately tracking a donor list difficult at best, and impossible at worst. (I pity the lawyer or accountant who has to fill “XXXDarkLordUnicornRainbowXXX” into a Schedule B.)

If the money does end up going through a private foundation, as is the case with GoFundMe, then you are more likely to be able to create an accurate donor list. There is still no guarantee.

My advice here is that if you are going to do crowdfunding, you have to decide ahead of time how you will treat the identities of your donors and then stick to that plan. You can’t be sure if what you are doing is ultimately what the rule will end up being, but consistency does count for something with the IRS.

Problem #3: Charity Registration

Most states—38 of them, to be exact—require that a nonprofit organization register with the state to solicit funds from the general public. They may require it once your organization has earned a certain amount of money, or within 30 days of your fundraising event, or even before you can ask for funds at all. It varies from state to state. When you fundraise online, you technically are fundraising in all 50 states, which is in theory likely to trigger all 38 of the fundraising requirements. This is, as you might imagine, a big mess. I say “in theory” because these requirements are old laws, most of them written before this century, and none of them truly up to date with the modern state of technology and the internet.

Further muddying the water is what, if any, effect the crowd fundraising platforms acting as middlemen have on these laws, and if they are acting as professional fundraisers.

It’s hard to say how serious the states are about these laws when it comes to internet fundraising, but it is currently the law of the land that you need to register if you want to fundraise. This leaves it up to you to determine the risk of pursuing a fundraising activity that I honestly can’t say to what extent is legal or illegal—a little unhelpful, I know.

The Good News: You Probably Aren’t Going to Be the Test Case

One day, a state Attorney General is going to decide to test the charity registration laws and sue someone over these legalities. They will almost certainly pick one of the major players in the space, either one of the fundraising platforms or a very large, well-funded nonprofit. Your booster club is unlikely to be in anyone’s crosshairs. Why? When some brave soul decides to invest the time and energy to sort this out, they’ll need to make sure everyone in the nonprofit sector takes notice, and suing a small school booster club just won’t show they are serious. If you’ve weighed the considerations and crowdfunding still feels like the right fit for your organization, you can proceed forewarned and forearmed.

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