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My question is about how US tax laws apply in a somewhat complex situation. You are not my lawyer and this is not legal advice, but I'm not finding any relevant IRS rules here at all and I know some must exist somewhere, so I'd appreciate any pointers, if only to understand better how to even think about this kind of situation.

So first, suppose I decide to hold an informal fundraiser to raise money for a charity -- for example, I pass the hat around my friends, telling them that it's to raise money for the United Way, and then I take that money and send it in to the United Way as a single donation. There's two ways you might think about this: option 1 is that I'm aggregating and passing through the money, but really it's never mine – I'm just acting as my friends' agent. Option 2 is that there are two separate transactions: first I'm taking in money as income, and then I'm donating it. In the latter case, we have a problem: now I owe extra income taxes, and will need to use some of the money to pay for those, instead of passing it on to the charity.

Question 1: I believe, but am not certain, that "option 1" is the more sensible way to think about this, and that I do not owe additional income taxes in this situation. Is this correct?

Okay, that's the simplified version – the real situation is a bit more complicated. A group of people have been working on a project that's in the public interest, but in a loosely organized way as individuals, without any kind of legal non-profit setup. One person then organizes a fundraiser to support this project, originally intending to handle it informally as an individual and just accept the income tax hit – but then the fundraiser is much (much) more successful than expected, and suddenly we're looking at thousands of dollars in taxes. This makes us realize that we really need to handle this project in a more organized way, and so we set up a fiscal sponsorship relationship with an existing 501(c)(3), who can now accept donations for this project.

Question 2: Is it possible for the person who ran the fundraiser to take the donations received last month, and pass them through to the non-profit, without taking an income tax hit along the way? This situation is similar to the one above, in that here everyone donating understood that they were donating to support a specific charitable project... it's just that at the time the donations were collected, the project didn't exist as a separate legal entity.

Edit: since it seems like my phrasing might have been confusing, here's another way to put it:

Scenario 1: I come up with an idea for a cool project, and I set out to make it happen as a regular individual. Some other people also think it's cool, so they donate money to me to help it happen. Think of like, your average Patreon. Here, this money is clearly personal income and I obviously owe income tax.

Scenario 2: I come up with the idea for a cool project, I pitch it to a 501(c)(3) non-profit, and they agree that to take it on as a project. Now if people want to donate money to make it happen, they can do that by giving the money to the non-profit, which lets the donors get a tax break and lets me avoid having to pay income tax (since the money is going to the non-profit, instead of going to me).

Actual scenario: Let's say we start out in Scenario 1, and then switch to Scenario 2. Can we take the money that was donated to me as an individual before I set up the relationship with the non-profit, and redirect it to the non-profit, so that I can avoid paying income tax on the money, and our donors get a tax break? Why or why not?

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    Sheesh! Have the people write checks to the charity and toss them into the hat you pass around. Oh, wait, I forgot; people don't write checks any more, do they?
    – Dilip Sarwate
    Jun 29, 2018 at 15:11
  • @DilipSarwate Exactly. There is no benefit to standing in the middle of the donation.
    – quid
    Jun 29, 2018 at 17:39
  • Yes, obviously it would have been better to avoid getting in this situation in the first place. The question, like many on this site, is about options for recovering after making a mistake.
    – Nathaniel J. Smith
    Jun 29, 2018 at 19:09
  • ANY business is more than free to operate as a non-profit, amazon has done this. You were a sole proprietorship, yes? Are you getting W-2s for this money? no that means you aren't an employee, that means you were operating a business. You have expenses related to your revenue that so happen to equal 100% of your revenue, You therefore have no tax burden (unless you bump in to some potential gross receipts tax rule in your state which is very unlikely). You are horribly overcomplicating this. No one is misunderstanding your question.
    – quid
    Jun 29, 2018 at 21:18

2 Answers 2

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There are two simple ways to avoid the issue:

  1. You keep the money separate from your own (so don't put in your checking account, and don't mingle it physically with your wallet's content), keep records of the amounts that go in and out, and declare (in your mind) that you are acting as an agent. The money was never yours, as expected, so no tax consequences. The IRS would probably not have an issue with that, as the money legally was never yours.
  2. Alternatively, if you consider it income, you can deduct your charitable contribution from your income, and as the two are equal, it evens out. Unless you collect amounts in the range of your annual income, there will be no issues with that either.

I think you are overly concerned about the topic. Nobody would try to claim that this was 'income'. If your boss asks you to fetch his laptop from the other room, and you get it for him, are you tax-wise getting a gift of an laptop for 20 seconds, and then gift it back to him? No, you are simply handling assets for someone else that don't belong to you.

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Nonprofit isn't really about the taxation of the organization, it's about the tax benefit to donors.

Joe donates $1,000 to you. If you're a nonprofit Joe can potentially deduct that $1,000 from his taxes. You receive that $1,000, you have expenses related to your charitable mission, you spend it. You have no tax burden related to the $1,000.

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    This doesn't address the question at all. The question is about whether the person who collects the donations and then passes them on to the organization owes income taxes. (Though in the case where the ultimate receiver has 501(c)(3) status, it's also an interesting question whether the original donor gets the tax benefit.)
    – Nathaniel J. Smith
    Jun 29, 2018 at 6:40
  • It does answer the question. You want to stand in the middle of a donation and are concerned about your own taxation. Organizations only pay taxes on income net of expenses, you take in $1000, you expend $1000, you don't have a tax burden. +$1000 donation -$1000 expense (because you donated it) = $0 income. It's no different than if you are a computer repair shop that made $1000, but spent $1000 in rent. That answers your question. However, now the donors lose their tax deduction, and the donations are less efficient because you have costs related to your organization..
    – quid
    Jun 29, 2018 at 15:27
  • I'm pretty sure that "if you take in $1000, you expend $1000, you don't have a tax burden" does not in general apply to individuals, and this question is about taxation of an individual.
    – Nathaniel J. Smith
    Jun 29, 2018 at 19:14
  • Sole proprietorship. You are making this WAY more complex than it needs to be.
    – quid
    Jun 29, 2018 at 19:18
  • Ahhh now I see what you mean. Right, depending on how the money is spent, the person may be able to treat part of it as business expenses. If my research is right that's not true for charitable donations, so if they pass the money on to the 501(c)(3) then they'll still have to pay self-employment tax on all of it, and income tax on the amount below the standard deduction (more or less). But if they spend the money directly on expenses related to the project, they can treat that as a business expense and avoid all these taxes.
    – Nathaniel J. Smith
    Jun 30, 2018 at 4:18

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