PayPal donations, Tax-Deductibility?
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3 Answers
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You're confusing a lot of things:
- Only donations to registered 501(c)(3) nonprofits are tax-deductible. You're not a registered nonprofit with the IRS, so they're not deductible.
- It's the donor that deducts those donations from their taxes. You're the recipient.
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You have to pay taxes on any income (meaning incoming money). The only way around paying taxes is if you can get Non-Profit status from the IRS.
So, say you have a web site and you make background images. You can share these images for free, and ask for "donations". These donations are INCOME. dont let the term donation and donation to a non profit confuse you.
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Not true... gifts are not income. See IRS Publication 950 (http://www.irs.gov/pub/irs-pdf/p950.pdf). – Alex Papadimoulis 14 years ago
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@alex, although you are correct, you have to take into consideration the question "I got into small legal trouble". Here is the issue: The IRS taxes gifts as you stated in your answer to the person giving the gift. if the gifts are small, then they are not taxable. So if you gave me a gift of 100k, you would be responsible for the taxes. Some gifts such as college tuition's have no tax liability. The reason one would get into trouble is because they drew attention to themselves using gift reporting. From my experience there is a $2500 total threshold before the IRS sees your donations – Frank 14 years ago
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as actual income. The courts have ruled a gift is from someone with the intent of "detached and disinterested generosity. The problem with soliciting gift's is that the burden is on you to prove that those giving you the gift are doing it out of generosity with the key word being DISINTERESTED. Chances are if one supports your cause, project, etc they are in fact interested. It gets further complicated when the issue of donations come up. It is greatly looked down upon for a non-profit business to solicit a donation. And the trouble with paypal is the "Donation" button. – Frank 14 years ago
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In this case it seems that the user ran a Defense fund. Maybe the defense fund is to raise money for the USA military, (at which point he should file for Tax Exempt status). Maybe its a criminal defense fund for a Warez site, or a defense fund for an upcomming legal bout. We dont know, but its very safe to assume that one giving to a Defense fund would in fact not be DISINTERESTED. From the IRS perspective its an Audit flag waiting to happen. Donation buttons are great for SMALL tiny startups, but almost all CPA will tell you that even though the button reads donation, its income. – Frank 14 years ago
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Bottom line, he would not be in "trouble" if the IRS did not see these donations / gifts as income. Its often not worth the trouble to go through the audit process to explain that it is not. Its simpler to file as tax exempt if you are non profit, or report it as income if you are not. – Frank 14 years ago
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Frank's answer is not correct: true donations are not income.
When something (money or property) is given to an individual with no consideration, it is considered to be a gift. While there is a gift tax, it is a liability of the donor and not the recipient. And since the gift tax only kicks in at $13K/recipient/year**, it likely wouldn't even apply.
Just keep in mind the "no consideration" part. If you give anything of value in exchange for a donation, it becomes a purchase... which is subject to income tax.
** Some gifts don't trigger the gift tax (spousal gifts, paying for tuition, etc), and some gifts are tax deductable (gifts to non-profits).
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although your points are greatly taken, I fear you (and usually others including myself), have the mentality of what is right, rather than how the Federal government views these things. To the right auditor donations and gifts are borderline tax evasion, and at best avoidance, with the burden on you to prove that the gifts were legitimate from a Non-Interested party. The only traditional exceptions are family, spouse, tuition, and property (non-real estate) donations of small value. They see it as income, until you go through your audit and PROVE otherwise. Chances are you .. – Frank 14 years ago
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settle for the taxes due and a waived fine, with an understanding of changing your income structure and that you cannot repeat the mistake. IRS and federal government operate in a black and white world, where as business owners we often see the gray area and our cup is full mentality which drives us to be successful often allows use to see the gray areas as challenge that have to be navigated. The feds see the gray as black (I know this from GREAT personal experience, bot criminal and civil). My advice, the CUP is full, but when it comes to compliance, hire an advisor or put on your worst.. – Frank 14 years ago
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..case, safest bet hat. If you value your time as I do now after having much of it wasted through scenarios the author finds himself in, and some of it taken because of less honorable reasons, then you find yourself knowing its best in the long run to dot your i's when it comes to compliance, and view compliance, as often as possible, in the eyes of those who will audit, prosecute, and hunt you down if you were to make a mistake. – Frank 14 years ago
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