Written by Bernardita Antonia Montiel Rojas
Are you part of a nonprofit organization? Are you struggling with donations? Are you unsure how they work? Don't get frustrated, below we explain the basic knowledge you need to understand what a donation is.
A donation is a free transfer between two parties, the donor, who makes the donation, and the recipient, who receives it. The key word here is “free” , since compensation is prohibited.
What do we not mean by compensation? When making a donation there should be NO compensation, that is, nothing is expected in return. There may be some recognition in the form of symbolic gratitude or, by law, a compensation of up to 10% of the total amount donated is possible.
Main legal burdens
In Chile, all donations are subject to legal charges, mainly two:
If the donation was made in Chile, the person receiving it must pay philippines mobile number a donation tax, which ranges from 1% to 25%, depending on the amount.
For each donation made, prior authorization must be requested from a court (civil judge), which is known as the insinuation procedure.
What donation laws really do is to make the most of them, seeking to reduce the respective burdens that they entail.
Where do you record a donation?
All donations must be recorded in the internal accounting of each organization. Just like companies, non-profit organizations (NPOs) are also required to keep accounting records of their income and expenses. It is important to be organized in order to avoid any problems with the Internal Revenue Service.
NOTE: If the organization is funded solely by donations or public funds, the accounting is for administrative (not tax) purposes.
What are tax benefits?
As a general rule (for companies and NGOs), every time any person or organization has an increase in their assets, they receive a tax charge, regardless of where that income comes from.
In the case of a person's ordinary income (salary, business activities or rents) the tax that applies is Income Tax (Art. 1 of Legislative Decree No. 824). If we are talking about someone who has a term deposit and this generates certain interest, they also pay taxes.
If a natural person or an organization receives a donation, the tax payable corresponds to the Inheritance and Donations Tax, according to Law No. 16,271.
Example: If a company makes a donation, when delivering the money the law assumes that the money that one is donating is for one's own benefit, so the 27% of the First Category Tax or a 40% of the Rejected Expense Tax would be applied.
Making a donation can cost up to 75% in taxes, which is why tax benefits are so important, since through them donations are not “penalized” by taxes.
How are tax incentives applied?
The most common way in which tax benefits operate is the reduction of the donation as an expense, meaning that the donor can reduce the amount of the donation from his or her taxable income or reduce it as a tax credit, where in addition to the reduction as an expense, some laws allow part of the donation to be charged as a credit against the Income Tax that the donor must pay.
Still something lost?
It is extremely important to know how donations work, as they are one of the main sources of funding for non-profit organizations.
I invite you to delve deeper into the topic and expand your knowledge by reviewing this Webinar “The first step to understanding what donations are.” You can also continue to enhance your studies in our course on Management Strategies for OSFLs and Donation Laws for OSFLs.
We invite you to check out the webinar: