Submission Date:
Question:
A community member hosts a “free with donation” yoga class at our library, and attendees are encouraged to make a donation each class. These donations are collected by the yoga instructor who hands them to the circulation assistant and identifies it as a donation to the Friends of the Library organization. She keeps her receipts and totals the money each year, claiming these donations on her taxes as her contribution to a 501(c)3 organization (the Friends of the Library).
So my question is, does this constitute as fraud in any way? If so, will this be problematic for the yoga instructor, the Friends of the Library, or the Library itself (municipality) for hosting the event? They are collecting money from other people for providing a service and claiming all the donations collected as their own for a tax write off.
Any guidance on this will be appreciated! Perhaps a simple solution would be to re-word how this is done, saying that donations to the yoga instructor will be made to the yoga instructor and not advertised as a fundraiser for the Friends.
Thank you!
Answer:
This sounds like a lovely service to both the library and community, so I am going to make this answer as positive as possible.
First, it is clear from the question that the instructor (a “community member”) is not a library employee. So, they are either doing this as a volunteer or as an independent contractor.
Either way, before we delve into the financial/tax/deduction questions, I have to say this:
If the instructor is a volunteer, because yoga can involve some risk in injury, it is wise to have a letter in place confirming the terms of the volunteer service. That letter would address logistics, how the class is promoted, liability considerations (“hold harmless,” indemnification, insurance), and address the financial considerations (the donation arrangement).
If the instructor is an independent contractor who is getting paid to offer the class, it is wise to have a letter in place confirming the terms of the independent contractor service. That letter would address when/where the class takes place, how the class is promoted, liability considerations (“hold harmless,” indemnification, insurance), and finances (the donation arrangement).
For any library (and Friends), although incidents of injury are rare, because of the potential cost, addressing these “liability considerations” is critical. As it so happens, they can be addressed in the same letter that addresses the financial aspects.
Okay, now we can discuss the financial aspects.
The good news is that the member is 100% right: Perhaps a simple solution would be to re-word how this is done…
Exactly.
We won’t go over wording for all the combinations,[1] we’ll just deal with this scenario: a free, donation-accepting class conducted by a volunteer, with the donations turned over to the library, to be turned over to the Friends.
The issue here, of course, is: what is the donated income from the class—a direct donation to the Friends (held briefly by the library) or direct payment to the instructor?
This distinction is important.
If money paid by the attendees is a direct donation to the Friends, the instructor cannot claim a deduction for it (since it was never their income, it was only ever a donation).
If, on the other hand, the money paid by the attendees is a direct payment to the instructor, it can then be a donation from the instructor and to the Library/Friends.[2] That shouldn’t be a problem, unless the income is not declared.[3]
There is no scenario where the donations collected can become the value of the service that was volunteered, and thus the credit is for “in-kind” services. The IRS doesn’t work that way.[4]
The issue presented here is not rare or esoteric. In fact, it is so common, the IRS has a fancy name for it: the “assignment of income doctrine,” which basically says that if you earn money and immediately give it away, it is still taxable income.
To clear this up, the member’s “re-wording” suggestion is spot-on. However, before changing the publicity, it would be good to focus on the arrangement, so there is clarity between the instructor, the library, and the Friends. After that, the advertisements can be updated to fit the agreement.
Where can you get such a letter? It is best for a final version to be reviewed by your lawyer, but as it turns out, we occasionally get questions about yoga here. So, two places to start are Live streaming a chair yoga program and Liability Waivers for Library Fitness Programs.
In closing: Yoga is a beautiful activity and a library hosting it is providing a valuable community resource; the law and the IRS should never get in its way. With a careful arrangement, that can happen.
Thank you for a thoughtful question!
[1] We won’t go over them, but I can’t resist listing them: employee-led/free, contractor-led in a rented space/admission charged, contractor-led in a rented space/NO admission charged (rare), volunteer-led/free/NO donations accepted, volunteer-led/free/donations accepted.
[2] The wrinkle with this scenario is that you now have a person leading a for-profit class using a free library resource; that can be solved by charging a nominal rent for services that are of use to the community.
[3] A problem for the instructor, not the library. But we’re all in this together, right?
[4] It does work that way with in-kind donations of property (but not services). For more on that, see the IRS guidance at https://www.irs.gov/charities-non-profits/exempt-organizations-annual-reporting-requirements-form-990-part-viii-ix-and-schedule-d-financial-information.
