Credit cards are a common part of doing day-to-day business for most nonprofits these days. Donors typically use credit cards to make contributions, whether one-offs or recurring, and employees often rely on the cards when procuring supplies and services or traveling on behalf of their organizations. Some nonprofits have, or have considered, so-called “affinity cards” as a way of increasing revenue. Here are some things to think about if your organization finds itself in any of these circumstances.
Taxability of credit card rewards
Credit card rewards — including points, miles and gift cards — generally aren’t considered taxable income by the IRS, especially if they come with a spending requirement. But some exceptions apply, and they could arise if your employees charge expenses for the organization.
For example, if an employee uses a personal card to pay a business expense, and you reimburse the staffer, a cash-back reward on the charge might be taxable income for the employee. If your employees have “corporate” cards and you allow them to keep related rewards for their personal use, the IRS considers the rewards to be taxable income to the employees. Your employees should check with their accountants in these situations, so they don’t trip up at income tax time.
Deductibility of donated rewards
Credit card rewards can also come up in the context of contributions. You may have donors who wish to direct their miles or points to your organization. But they might expect tax benefits they won’t actually receive.
As previously stated, the IRS generally doesn’t treat such rewards as taxable income. The flip side is that the IRS also doesn’t allow taxpayers to claim a charitable deduction for donating rewards. Your donors could, however, get a deduction if they redeem their rewards for cash and then donate the cash.
Treatment of recurring donations as subscriptions
In the fall of 2022, Mastercard implemented a new rule for recurring payments. Among other things, the rule requires businesses with such subscription arrangements to send Mastercard members an email or other electronic communication with opt-out information every time a payment is charged.
Mastercard initially indicated that it would treat recurring donations as subscriptions subject to the new requirements, with the rules beginning to apply to nonprofits on March 22, 2023. The company has since retreated on that stance. While the requirements remain recommended “best practices” for nonprofits, an organization will be required to comply only if its recurring donation program experiences an “excessive” number of chargebacks or consumer complaints for four consecutive months.
Affinity card debate
Nonprofit affinity credit cards — charity-branded cards where the organization receives a percentage of a cardholder’s purchases — have come under criticism in recent years. For starters, the contribution percentage often is quite small. Moreover, if improperly structured, these arrangements could result in unrelated business income tax for the nonprofit.
But the cards can have benefits beyond just the bottom-line contribution revenue. They can, for example, increase engagement with supporters. They also might provide a low-cost marketing benefit, creating awareness and opportunities for users to talk up the organization when they use their cards at checkout. And affinity cards give prospective supporters who don’t want to have to think about it or who otherwise wouldn’t donate an easy way to show support.
We can help
Reach out to your contact at MJ if you have questions about the tax or operational implications of various credit card uses at your organization.