Reflexively, most of us would say “yes.” Most people use the donor’s intent to distinguish between charitable contributions and non-charitable contributions. If the donor’s intent was mostly altruistic, the cause was a socially-worthwhile one, and the donor received nothing in return, most people would consider the transfer a charitable contribution.
But the IRS does not look at it that way. To the Service, things like donor intent and the cause’s social value are completely irrelevant. The only thing that matters is the recipient’s presence or absence on the list of approved charitable causes. More on that below.
Incidentally, beginning in the spring of 2019, there may be many fewer people claiming charitable and other itemized deductions. The 2017 Tax Cut and Jobs Act scaled back a few categories. For example, TCJA capped SALT (state and local taxes) deductions at $10,000 per year. But more significantly, TCJA doubled the standard exemption for most filers. As a result, many observers expect the number of itemizing taxpayers to go from about 30 percent to roughly 8 percent. It simply does not pay for most people to itemize.
Charitable Contribution Rules
The charitable contribution deduction is one of the most commonly used ones in all of income tax planning. But the IRS definition of a charitable contribution is not at all subjective. Instead, it’s completely objective, based on the recipient’s status. Contributions are tax-deductible if the recipient is:
The government or a government agency, including a government-created civil defense agency,
Recognized religious organizations,
Nonprofit volunteer fire departments,
Most war veteran and fraternal organizations,
Some cemetery companies, and
Community chests.
This deduction is a policy deduction. It’s designed to encourage voluntary contributions to social organizations and therefore decrease the tax burden.
Crowdfunding recipients are almost always individuals. Individuals are almost never 501(c)(3) charities, regardless of their niche. Indirect recipients do not count. If the crowdfunding payee sends all collected money to the state government to build a bridge, that’s all fine and well. But it does not make the fund donations charitable contributions.
Crowdfunding Accounts and the Gift Exemption
The gift exemption is not a policy exemption, so it is a bit more subjective. According to Information Letter 2016-0036, crowdfunding receipts are generally gifts if:
A “detached generosity” motivated the givers, and
No one received anything in return for their donations.
Somewhat ominously, the letter points out that “a voluntary transfer without a “quid pro quo” is not necessarily a gift for federal income tax purposes.” In fact, the Internal Revenue Code presumes that all income is taxable. The taxpayer has the burden of proof to establish that it is a gift or some other non-taxable income.
Many crowdfunding donors have mixed motives. Assume friends of Wrongfully-Accused Willie start a GoFundMe site to raise money for his legal bills. Most likely, the givers are only partially motivated by detached generosity. They surely want to help Willie. But they are also giving to make a statement. They may also be motivated by animosity toward someone or something. Arguably, therefore, Willie’s GoFundMe site flunks the generosity test.
The quid pro quo prohibition may be a problem in some cases as well. The charitable contribution rule pertains to proportionality. If a giver donates $1,000 and receives a $50 tote bag, $950 is tax-deductible. But if Willie’s crowdfunding donors receive anything, even commemorative pencils, his crowdfunding receipts may not be a gift.
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