Once you've decided to create your own charity and have taken care of the legal technicalities involved in forming your charity, the most challenging thing you'll face is raising funds to pursue the charity's mission. While every charity's dream is to have donors walk into their offices and write out a big check, most charities have to work a lot harder to get donations. In addition to fundraising campaigns asking for direct contributions, many charities come up with extremely creative ways to motivate potential donors, ranging from auctioning merchandise from local businesses to creating calendars featuring scantily clad animal lovers posing with their pets.

Whenever your organization receives a donation, it's important to know and follow the rules governing what information you have to give back to the donor. Known as substantiation and disclosure requirements, these rules help donors justify the deductions they take on their tax returns to the IRS. Failing to follow the rules can result in some extremely angry donors if the IRS chooses to audit their returns based on the charitable deductions they take.

Rules for cash contributions
The rules for accepting cash and checks as donations are very simple. If you receive a charitable contribution of $250 or more, then you must provide a written acknowledgment to the donor. The acknowledgment must include the amount of the gift and the name of the organization. In addition, the acknowledgment must either state that no goods or services were given to the donor in exchange for the contribution, or it must describe and estimate the value of any goods and services that the donor received for the gift. For example, if your charity encourages people to make gifts of $100 or more by giving them a DVD worth $20, then your acknowledgment letter must include that information.

A charity can give donors certain items without having to include them in their written acknowledgment. If the item has only token value, defined as worth less than 2% of the gift up to $83, then it need not be included. In addition, promotional items that bear the logo of the charity, such as pens, mugs, and other small gifts, need not be included if the donation is $41.50 or more and the cost of the promotional item is less than $8.30. Furthermore, membership benefits, such as free-admission tickets, discounts on items sold in the charity's gift shop, or discounted parking, don't have to be included in the acknowledgment.

Note that while single gifts of $250 or more require documentation, multiple smaller gifts that add up to $250 do not. In other words, your organization is not responsible for keeping track of every small gift received from a donor to determine whether they have gone over $250 for the year; you only need to look at the amount of each individual gift. As a practical matter, however, many charities provide written documentation for all donations as a way of communicating their gratitude.

Charitable auctions
Many charities raise funds by soliciting items from various businesses and individuals throughout the community and then auctioning each item to the highest bidder. These auctions are often elaborate formal events that include dinner, entertainment, and other activities.

One of the reasons why donors like participating in these events is that they're a fun way to make a tax-deductible donation to charity. What some donors don't understand, however, is that if they make a winning bid on a particular item, they may not deduct the entire amount of their bid. Rather, they must take into account the value of the item they won in the auction. Therefore, to ensure that donors have all of the information they need to claim the correct deduction amount, charities are required to provide a written disclosure statement to any donor who receives goods or services in exchange for a payment exceeding $75. The statement must include the value of the goods or services received by the donor. This disclosure must occur either during the solicitation of the donation or when the donation is received, and it must be made in a way that is likely to come to the attention of the donor. Although charities may fear that disclosing fair market values during an auction will discourage bidding above a certain level, the safest way to comply with IRS requirements is to make it clear to bidders what the fair market value of the auction item is.

Accepting non-cash contributions
Donors often find it valuable to make contributions in forms other than cash. For instance, donors who own shares of stock that have risen in value since purchase may want to donate those shares. By doing so, the donor avoids incurring capital gains tax and can usually still deduct the fair market value of the shares. In addition, donations of equipment and other items that are directly related to the charity's mission are often extremely valuable to charities. For the most part, charities may accept these donations subject to the same rules for cash contributions, including in the written acknowledgment a description of whatever item was donated. In some cases, donors will need to obtain an appraisal of items they donate, but this isn't the responsibility of the charity.

Until recently, many charities accepted old vehicles as donations. Because of abuse that resulted in some private parties benefiting from charitable contributions, the IRS now enforces special rules that apply to donated vehicles. These rules are fairly complicated, but they essentially prevent the previous practice of allowing donors to deduct Blue Book value for vehicles that charities subsequently sold for far less than Blue Book value. For charities intending to accept vehicles as donations, IRS Publication 4302 goes through the relevant requirements.

Finding donors is essential for the success of your charity. Once you've done the hard work of finding them, make sure you treat them well by giving them everything they need to obtain the tax benefits they deserve.

For further charitable Foolishness:

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Fool contributor Dan Caplinger has worked with charities large and small. He doesn't own shares of Hilton. The Fool's disclosure policy is always in your best interest.