This blog post highlights vital regulatory considerations for businesses handling online donations for nonprofits, focusing on registration, tax records, state reporting, and GAAP compliance.
I love taking the Tube in England and the charming, English-accented voice that always says “mind the gap.”
It always makes me look down and watch where I’m going.
It’s also great advice for your business when facilitating online donations for a nonprofit.
Because facilitating online donations or round-ups at checkout is so clearly altruistic, we tend to think that it's as simple as passing donations onto the nonprofit with whom you are working.
But…mind the gaps.
In reality, taking online donations in conjunction with a cause marketing campaign is a highly regulated and controlled activity.
A few bad apples along the way have misdirected donations – or kept them for their business – instead of passing them along to their nonprofit cause marketing partners.
So, states have put in place myriad regulations to make sure that taking online donations in a business environment isn’t abused.
Plus, tax and financial reporting requires another layer of financial reporting that verifies your activities.
We’ve identified four major regulatory gaps that businesses often miss when engaging in cause marketing and working with a nonprofit to solicit donations online.
Here they are:
Gap #1 - Forgetting to register as a commercial co-venturer
If you:
- Are a for-profit business
- Solicit donations online for a nonprofit
- Use that nonprofit’s image, name, or cause at checkout or in any marketing
You are a commercial co-venturer (CCV).
If you are a CCV, you must register and regularly report compliance and data to multiple states throughout the U.S.
This includes every state in which you solicit donations that has CCV regulations.
If you sell online, that’s probably every regulating state – currently 30 states and growing.
You are required to register in each of those states, provide specific information about the nature of your relationship with the nonprofit, report financial information related to donations solicited (not in all states), and, in some cases, post a surety bond.
Failing to properly register can leave you open to serious fines and penalties, regulatory action, and very nasty press concerning your compliance on soliciting donations.
This is gap #1, and arguably, the most important.
Many businesses are using online platforms to solicit donations, but have not integrated regulatory compliance into their donations technology. This leaves them wide open for significant regulatory risk.
As the regulatory environment has evolved, Change has incorporated legal compliance and financial reporting into its online donations platform.
A for-profit business simply cannot afford to risk regulatory compliance issues when it works with a nonprofit in cause marketing.
The financial fines and penalties are prohibitive.
Gap #2 - Proper recordkeeping for tax reporting
You're collecting donations.
That looks a lot like revenue.
You’re paying money out (to a nonprofit), and that looks a lot like an expense.
But who’s to say how much you received as donations and paid out?
What is your 3rd-party single source of truth?
Your CPA (and maybe the IRS if there is an audit) will want to see a 3rd-party-generated report that shows the revenue collections, the direct expenses associated with those collections, and the specific accounting for the payment of the donations to respective nonprofit organizations.
Change has built a suite of specific financial reports to provide the 3rd-party-generated financial reporting necessary to satisfy your tax CPA and any government regulatory body that may come along.
Ready to simplify giving?
Talk to one of our experts today to find out how Change can help you.
Gap #3 - Proper recordkeeping for state donations reporting
Hand in hand with tax reporting, many states require specific financial reporting to their regulatory authorities for donations and payments received and made by the CCV.
This means you.
Not only must you provide updated summaries of status and activities, you also must back up the information with verifiable 3rd-party-created financial information which is subject to review and audit.
CCV reporting at the state level invariably includes financial reporting as well.
Gap #4 - Financial reporting according to GAAP
In addition to tax reporting, soliciting donations for a nonprofit requires a specific chart of account recording and reporting of financial information in a Generally Accepted Accounting Principles (GAAP) manner.
As is the case with tax reporting, CPAs want to see a 3rd-party-generated report that ticks and ties to the financial statements and verifies revenues and expenses in a consistent manner.
Summary
Working with a nonprofit on a cause marketing campaign is a great way to contribute to society, engage your customers in your business’ social goals, and increase sales through greater customer engagement and loyalty.
It’s a win-win-win.
But, there are significant regulatory risks that the for-profit business incurs.
These risks can be managed, but it's important to know that an online donation platform cannot just solicit and facilitate donations without filing as a CCV.
An online donation platform MUST have a comprehensive, integrated compliance feature that facilitates regulatory filings, financial reporting, and overall compliance for you and your company.