As a society, we give nearly 2 percent of our personal income to charities and nonprofit organizations. "People have misconceptions about nonprofits," says Jason Parquette, a senior tax accountant with Christopher T. Pakos, CPA, PC. "They don't realize a nonprofit is not necessarily a charitable organization."
For tax purposes, the law classifies charities and nonprofits according to their mission and organizational structure. Each group must register with the IRS for the section of the law that applies to it. Religious and charitable organizations fall under section 501(c)(3) and can receive tax-deductible donations. Not every section allows these deductions. For instance, social welfare and civic organizations registered under section 501(c)(4) don’t qualify. However, two types of 501(c)(4) organizations -- veterans' organizations with 90 percent war vet membership and volunteer fire departments -- do qualify for charitable deductions.
Because the IRS allows deductible donations to some entities that aren't registered as a 501(c)(3), donors can get confused. For example, taxpayers often have the mistaken belief that civic and employee associations qualify as charitable groups. "Retired worker associations with limited memberships do not qualify," notes Parquette. "Sports groups generally don't, either, although it depends on how they're structured." He recommends asking upfront. "Clients often come in with canceled checks only to learn that they gave to a group that doesn't count as charitable."