What Libraries Should Know About Receiving Charitable Gifts

To encourage charitable giving in the private sector, Congress has granted favorable tax treatment to charitable contributions by individuals for more than 60 years. In addition, many organizations benefit greatly from charitable gifts. However, when a person or organization makes monetary or property donations for the benefit of an organization such as a local library or public library district, some common questions arise. “How does a local library or public library district qualify to accept charitable gifts?” “Should the local library or public library district set up a foundation?” “Are there other alternative methods available?” “What are the tax benefits and/or consequences, both to the donor and the local library or public library district, of charitable gifts to the library?” The following paragraphs attempt to briefly answer these questions.

Important: Library trustees and staff should not provide donors with individual tax advice or promise that a particular contribution will produce a specific tax result.

Charitable Foundation Status

An Illinois public library may qualify to accept a charitable gift in two ways. The first method is to set up a tax-exempt foundation qualified under the Internal Revenue Code, §501(c)(3). First, the local library or public library district would have to establish a not-for-profit organization “organized and operated exclusively for . . . literary or educational purposes.” Technically and legally, this corporation would be a separate entity from the library. The most common example in Illinois would be a not-for-profit Illinois corporation organized through the Secretary of State’s office. Articles of incorporation, bylaws, a board of directors, a registered agent, a registered office, and an annual report filing are all necessary elements for such an organization. This relatively inexpensive and easy not-for-profit incorporation does not, by itself, make the entity tax-exempt or contributions to it tax-deductible.

The second step: since the IRS defines a charitable contribution as a “contribution or gift to or for the use of” certain types of organizations, the corporation would have to apply to the IRS for “charitable foundation status,” commonly called 501(c)(3) status. Once established, the foundation may receive charitable contributions, much like the well-known 501(c)(3) foundations (e.g., the American Cancer Society, the United Way).

The basic method of forming a foundation is not only a lengthy process, in terms of forms and approval from the IRS, but also expensive in terms of application and renewal fees, annual tax returns, and accountant or attorney fees, and a highly technical process with many traps for the unwary. In addition, although a donor’s charitable contributions are usually deductible for tax purposes, a transfer of money or other property to a charitable organization is not always an allowable charitable contribution for tax purposes. A charitable gift is deductible only if it is made to or for the use of a charitable organization qualified to receive such a gift. The precise question of deductibility should and must be left to the donor and his or her attorney or accountant, since it varies somewhat, based on the donor’s particular status.

Until 2014, when the IRS significantly modified this process by creating a simpler alternative for smaller not-for-profit charities, forming a foundation was usually not the best approach. The burdens, not just of initially establishing the state and federal aspects of a 501(c)(3), but also the annual filing requirements, always lead to “overhead” costs that are deducted from the donations themselves. In fact, many such 501(c)(3)s (numbering over 500,000 nationwide) have been shut down by the IRS over the past decade for failure to follow the applicable rules of operation and reporting.

But in 2014, the IRS simplified the application process (and lowered the filing fees somewhat) for its part of the process (i.e., the tax-exempt application for smaller not-for-profits). The application Form 1023 (40 pages, plus required attachments) was reduced to Form 1023-EZ (3 pages, which can be filed online only), so long as the corporation’s gross receipts are under $50,000 in any of the past three years or are expected to be under $50,000 in the next 3 years and it has assets under $250,000. The IRS periodically modifies eligibility thresholds, filing fees, and processing times for Forms 1023 and 1023-EZ. Libraries considering this option should confirm current requirements directly with the IRS or counsel. For many library programs, this small not-for-profit class may apply and will significantly reduce the initial burden. Note: Illinois charitable corporations are generally required to register and file annual reports with the Illinois Attorney General under the Illinois Charitable Trust Act, in addition to any filings required by the Secretary of State. These ongoing compliance obligations may carry penalties for noncompliance and should be carefully considered before formation.

However, it does not change the required local (i.e., state) steps or the annual reporting requirements under both state and federal law. These costs remain significant and should not be underestimated. Thus, the operation as a 170(c)(1) may still be the better way.

Usually the Better Way

The second method – and, we believe, usually the better way – by which the local library or public library district may qualify to receive charitable gifts is inherent in its nature as a part of a municipality (local library) or a sovereign political subdivision (public library district). Both types of libraries fall within the term “political subdivision” as used by the IRS. The Internal Revenue Code §170(c)(1) states that any political subdivision may receive charitable contributions, “but only if the gift is made for exclusively public purposes.”

Under Illinois library law, any person or group of persons may make donations of money or property for the benefit of any local library or public library district. [75 ILCS 5/1-6 and 75 ILCS 16/30-75] Title to the donation vests in the library board of trustees, upon acceptance according to the terms of the donor’s deed, gift, devise, or bequest. The library’s board of trustees automatically becomes a special trustee of the donated property under the library statutes without having to form a separate corporation or apply for the §501(c)(3) status of a foundation. Because of §170(c)(1) of the IRC, political subdivisions do not have to file for qualification as a §501(c)(3) organization initially, nor report annually to the IRS with information tax returns. This preferred status saves significant money both initially and annually thereafter, benefiting the charitable goals rather than the lawyers and accountants.

The benefits of §170(c)(1) and being part of a municipality or political subdivision (rather than forming a foundation) are:

•  The libraries save money.
  • The municipality/political subdivision has already been “incorporated” when it was formed or organized under Illinois law; thus, there is no need to form a separate not-for-profit organization or incur the initial or annual costs of doing so.
  • No additional state forms must be completed initially or annually, and there is no annual reporting beyond the annual state library report.
  • No additional filing fees or attorneys’ fees apply.
  • The §501(c)(3) application to the IRS and subsequent determinations are not needed since §170(c)(1) applies.
  • No IRS approval is required, no filing fees are incurred, no annual state or federal tax returns are required, and no separate audits are conducted.
• The donor will receive a tax deduction if the donor otherwise qualifies.
• The restrictions placed on the donation under §501(c)(3) are the same under §170(c)(1).
  • The donor can direct how the charitable donation is to be used. For example, the donor might instruct the board of trustees to use the charitable donation to purchase computers (the library, however, does not have to accept such terms).
  • If the library board of trustees accepts the gift, it is legally bound to honor the donor’s request.
  • Like the foundation, a charitable donation given to a §170(c)(1) municipality or political subdivision may be a long-term investment.

The extent to which individuals may deduct charitable contributions for income tax purposes is limited by federal law. Limitations are imposed both on the amount of the contribution that may be deducted and on the extent to which the contribution deduction may reduce a donor’s taxable income.

The income tax results of such gifts differ widely among individual donors. The tax benefits of charitable giving depend ultimately on the nature of the property given, the types of organizations to which donations are made, the donor’s current and future income level, and the donor’s marital status. A word of caution: Neither the libraries nor the library board of trustees can give accurate advice regarding the taxability of a donor’s contributions. Donors should seek the tax advice of counsel or their accountant to ensure they are in compliance with their tax returns and deductions.

The humanitarian and moral aspects of private philanthropy have always been its primary motivating force. However, the tax benefits of charitable giving have grown in importance as our tax system has grown in complexity and scope. Donors who make charitable contributions to governmental units under §170(c)(1) must be aware that they can receive a favorable tax deduction. They are not treated more favorably by contributing to a §501(c)(3) foundation. Moreover, the initial costs and the annual fees incurred by a foundation are much higher than any incurred by a unit of government such as a library, so that more of the principal should be available for actual use or the “end

purpose” of the donation and less for “administration” and accountants’ or attorneys’ fees. Even the best-managed and operated charitable foundations lose over 5% of their donations to various “overhead” reporting expenses, both state and federal. The poorly managed, almost scandalously operated “charitable” foundations lose 50% of donations to such “middlemen” overhead costs and salaries.

Of course, the size of expected donations may influence the decision to create a corporation/foundation. If the initial set-up costs are $1,000 and the annual costs $200 to $300, then donations in the range of $5,000 to $15,000 may not justify the costs involved (i.e., the costs match the income from such principal or even may require use of some of that principal). On the other hand, donations in six figures, particularly if more likely to be made to a foundation rather than a governmental unit, can well justify those costs, which is why so many Illinois school districts, not likely to receive any direct donations from the public, tend to form foundations and pay those costs, as they have little alternative. But even here, consideration should be given to much cheaper options (see discussion below of the ILA’s Fund for Illinois Libraries, formerly operated by ILSDO).

The three most common concerns expressed are that 1) potential donors do not wish to give to a tax-supported governmental unit; 2) the bylaws of many private corporations’ foundations (which presumably have already been approved by the IRS and are not otherwise in need of amendment) require 501(c)(3) status of their donors, thus keeping governmental units from benefiting therefrom; and 3) creating a foundation will focus library/community energies on private fundraising and thereby supplement library revenues. The third point does not in fact hold true. The success of energetic fundraising does not rely on foundations. In other words, there are many examples of successful and energetic fundraising done by governmental units (and their “friends”), particularly public libraries, without the use of foundations, and there are many examples of ineffective and unsuccessful fundraising in which foundations have been established (and where eventually the annual costs and requirements lead to dissolution, either voluntarily or by state and federal action, or even where the failure to file information returns penalties are much larger than any and all donations received).

There are two thoughts to keep in mind: 1) never use paid, professional fundraising, and 2) your success will depend on locating, recruiting, retaining, and utilizing the type of committed and talented, local people who themselves are donors and will encourage others to donate (whether a foundation is used or not).

As for the other two concerns, if there are foundations likely to donate or grant to the library with such restrictive bylaw provisions and the size of the donations and/or their frequency will justify the set-up costs and annual costs of a foundation, then it is entirely appropriate to do so. However, the Illinois Library Association’s (ILA) Fund for Illinois Libraries program may be far more preferable (and much cheaper both in the short-term and in the long-term) than forming and operating a 501(c)(3). It is unlikely, but it may be worth raising with the foundation the possibility of amending its bylaws to broaden the restriction to include local governmental units or, specifically, public libraries, but the costs of doing so from the foundation’s perspective may be prohibitive. Such a foundation would have the same or similar requirements as a library foundation, and it points to the high standard of business activity which the IRS, and to a lesser extent the State of Illinois, requires of 501(c)(3) organizations.

As for a donor’s hesitancy to give to a taxing body, it may be a persistent view, but often, after the history of charitable support for public libraries is explained, the donor will reconsider. In addition, many prospective donors, particularly the more sophisticated, will appreciate the savings from the setup and annual costs of a foundation, so that 100% of the principal and income from donations can be used for the library or the intended purpose of the donation.

Due to the necessarily strict state and federal rules for operations of tax-exempt corporations, the attendant high costs of proper operation (as well as the frequent failure of such foundations to meet all compliance without suffering penalties and interest charges), and the occasional need for libraries to have a 501(c)3 alternative for some types of donors, in 1999 the Illinois Library System Directors Organization (ILSDO), then a properly operating 501(c)(3) itself, formed to promote the development of Illinois libraries and initiated a free program for Illinois libraries to use. The Fund for Illinois Libraries was created as a temporary receptacle for donations by donors whose rules or bylaws only permit giving to 501(c)(3) s. Upon deposit of such payments with the Fund, for the credit of a specific Illinois library, ILSDO immediately sent a comparable payment to the library. It did not serve as an investment advisor or agent, nor was the money invested by the Fund. It was sent directly to the library. But ILSDO, as it had done as a 501(c)(3) all along, filed the required annual state and federal reports and tax returns, thus saving the libraries the responsibility and costs of doing so.

With the demise of ILSDO in 2011, the Fund for Illinois Libraries was reestablished as a program of the Illinois Library Association, also a properly established and operating 501(c)(3) for the promotion, support, and general benefit of Illinois public libraries and specifically its members. Due to the number of participating libraries and donations, the program is no longer free. Modest fees are now charged to process these donations. Details on fees and the program itself can be obtained directly from ILA’s Fund for Illinois Libraries program. Assuming libraries arrange for only those donations truly requiring a 501(c)(3) receipt to be sent to the Fund for Illinois Libraries (and not donations from individuals and corporations that may properly go directly to the library as a 170(c)(1)), these fees will be far cheaper than organizing and properly operating a 501(c)(3) themselves.

Illinois Library Association Fund for Illinois Libraries

The Fund for Illinois Libraries was created in 1990 to help Illinois libraries in their fundraising efforts. Libraries often solicit funds from the general public, businesses, and foundations. For many libraries, this means foregoing a gift, as the time, effort, and costs of establishing and maintaining 501(c)(3) status are prohibitive.

The purpose of the fund is to enable libraries to receive gifts from individuals or organizations that can only make donations to 501(c)(3) charitable organizations. The Illinois Library Association (ILA) is the administrator for the Fund. In that capacity, ILA provides a fund agreement to participating libraries that allows them to solicit funds and provide donors with an ILA tax-exempt letter to document the tax-deductibility of their donation.

The participating library directs the donor to make the contribution at https://www.ila.org/donate/submit.

The annual fee associated with processing donations in a year is listed on the ILA website. The library must be or become an ILA institutional member during the year in which the service is being used. For additional information, contact:

Illinois Library Association

560 W Washington Blvd

Suite 330

312-644-1896

https://www.ila.org/initiatives/fund-for-illinois-libraries

Gift Acceptance Policy

A written gift acceptance policy helps establish consistent expectations for donors, staff, trustees, and the community. The policy should explain who may accept gifts, when board approval is required, how to handle restrictions, and what happens to donated materials or property the library cannot retain.

Topics to Address in a Gift Policy

• Donations of books and other library materials
• Memorial and honorary gifts
• Art objects, equipment, real property, securities, and other non-cash gifts
• Cash contributions
• Restricted and unrestricted gifts
• Authority of the library director and board of trustees to accept gifts
• Recognition of donors and memorial gifts
• The library’s authority to use, sell, transfer, or dispose of accepted property when appropriate
• Acknowledgment letters and the library’s policy against appraising donated property
• Use of a written gift agreement for significant or restricted gifts

Ready Reference Tip: A gift policy should preserve the library’s ability to decline a gift when the restrictions, costs, condition, storage requirements, ongoing obligations, or other terms are not in the library’s best interests.

Acknowledging Gifts and Valuation

A library may acknowledge receipt of a donation, but the source material advises that the library should not appraise donated materials or art for the donor. Donors who need a valuation for tax or other purposes should determine the value themselves or use an independent qualified appraiser, as appropriate.

Gift Agreements

A written gift agreement can document the donor’s intent and the library’s acceptance of the gift. For restricted gifts in particular, the agreement should identify the restriction clearly and reflect formal board approval when required by library policy.

Charitable Giving Forms

Overview

Charitable gifts can meaningfully support library collections, programs, services, and other community needs. Consistent forms and procedures help libraries document gifts, communicate donor intent, acknowledge contributions, and ensure restricted gifts are handled appropriately.

The sample forms below provide practical starting points for common charitable giving activities. Libraries should customize them to reflect their own gift acceptance policy, procedures, and organizational practices.

Sample Donor Letter

Provides a sample acknowledgment letter that a library can customize to thank a donor for a charitable contribution. The sample recognizes the donor’s support, explains how gifts help the library pursue its goals and serve the community, and allows the donor to contact the library with questions.

This sample is written specifically for a contribution received through the Illinois Library Association’s Fund for Illinois Libraries. It includes language stating that the donor received no goods or services in exchange for the contribution.

Sample Form: Sample Donor Acknowledgment Letter (PDF)

Sample Gift Agreement Form

Provides a sample form for documenting a donation of materials or other property to the library. The form records the donor’s information, describes the donated material, and provides space for information that may assist the library in organizing or cataloging the gift.

The agreement also documents the transfer of legal title to the library and distinguishes between unrestricted and restricted gifts. It includes acceptance by the library director and additional board signatures and approval information for restricted gifts.

Sample Form: Sample Gift Agreement Form (PDF)

Sample Gift Book Program Form

Provides a sample form for libraries offering a memorial or honorary book program. Donors may contribute toward a book placed in the library in memory of an individual or in honor of a birthday, anniversary, graduation, or another occasion. The form also allows donors to indicate a preferred subject for the book.

The form collects the information the library needs to notify another person that the donation has been added to the collection in memory of or in honor of the named individual. It also includes donor contact and payment information.

Sample Form: Sample Gift Book Program Form (PDF)

Before Using a Sample Form

Important: These forms are provided as educational samples and should be customized to reflect the library’s current gift acceptance policy and procedures. Libraries should review forms periodically to ensure that acknowledgment language, approval procedures, recordkeeping practices, and other provisions remain appropriate. Library trustees and staff should not provide donors with individual tax advice or promise that a contribution will result in a particular tax benefit.