Nonprofit Scrip Sales and Donor Tax Deductions
Nonprofit donors may be able to deduct a portion of scrip purchases at tax time.
If your nonprofit sells scrip as part of its fundraising activities, your donors may be wondering whether they can deduct the amount they paid for the scrip on their federal tax returns. The answer depends on how your nonprofit communicates with donors when selling the scrip. Read on to learn more. (For more tips on rounding up charitable donors and handling the tax side of donations for your nonprofit, check out Nolo's articles Getting Charitable Donors for Your Nonprofit and Tax Deductions for Charitable Giving - The Nonprofit's Responsibilities.)
What is Scrip?
"Scrip" is similar to a gift certificate. A nonprofit buys it from a vendor at a percentage discount and then sells it to donors, ideally at full face value. For example, your organization might buy $100 scrip cards from a local grocery store for $95 apiece, sell them for $100 apiece, and thereby net $5 from each sale. These transactions can also be done through online services.
Selling scrip is a popular way for schools and other small charitable organizations to earn money, particularly from donors who feel unable to make any more direct contributions but would willingly hand over money that they've already budgeted for groceries (or gas, clothing, gifts, or whatever else is available from the many stores offering scrip). The donors are happy knowing that, by spending the same amounts they do normally, your nonprofit reaps a benefit.
Scrip and Taxes: IRS Guidance for Nonprofits and Donors
Now for the tax implications. We're lucky that the IRS, in 2009, issued what's called a Private Letter ruling responding to a question regarding this matter. (See PLR-118535-09 on the IRS website at www.irs.gov). According to the IRS, in situations where the nonprofit actually offers the donor the option to be given all or part of the discount received from the vendor instead of donating it all to the charity, and the donor chooses to donate the offered rebate, the donor can deduct this amount. Using the example above, where your group offers a $100 card with a $5 discount, you'd want to ask your donors in writing something like, "Please choose between receiving a $2.50 rebate on your scrip or donating this amount to our group." Note that your group probably wouldn't want to offer donors the full $5 back, so as to cover the expenses of administering this program.
By contrast, if your nonprofit sold the scrip at its full face value and didn't give donors the option of receiving a rebate, their contribution wouldn't be voluntary and, therefore, wouldn't satisfy the IRS's criteria for making a charitable deduction. Also note that some schools give parents the choice of having the scrip rebate go straight toward tuition or other expense obligations, which wouldn't be considered a charitable contribution either.
This IRS ruling might not make a huge difference to many donors' tax situations, although it might for some, particularly school parents who buy thousands of dollars' worth of scrip. And, for donors who really worry about tax implications, it's worth noting that the rebate amount, if the donor chooses to receive it, won't be added to the donor's gross income for tax purposes.