For a PTA, using gift cards is not the simple solution many would like it to be—a unique set of IRS-related issues and considerations need to be addressed. Check out the WSPTA blog post on gift cards. Much of the info shared below came directly from that post.
First, some important definitions to know:
A PTA qualifies as tax-exempt under Section 501(c)(3) if it demonstrates to the IRS that it is organized and operated primarily for charitable purposes. Furthering the health, safety, welfare and education of children and youth is a charitable purpose.
To maintain tax-exempt status, a PTA must:
- Continue to further its charitable purpose (the health, safety, welfare and education of children) and not engage to a substantial degree in any non-charitable activities.
- Abide by the limitations on political activities and lobbying and the prohibition on private benefit/private inurement.
- Maintain active incorporation by renewing each year.
- File annual returns with the IRS In the case of an IRS audit, if it is determined that a PTA has not abided by these requirements, the IRS can revoke tax-exempt status, assess fines, and/or require the PTA to pay back taxes on income earned.
Private Benefit: A 501(c)(3) organization’s activities should be directed toward some exempt purpose. Nonprofits are organized for the benefit of the public, not individuals, and they must serve a charitable class. Its activities should not serve the private interests, or private benefit, of any individual, organization or subset of their community more than insubstantially. For example, a PTA would not qualify as a public charity if it limited its purpose only to children of PTA members.
Private Inurement: A 501(c)(3) organization is prohibited from allowing its income or assets to benefit insiders—typically board members, officers, directors and important employees of an organization. If an organization benefits an insider, the insider and the organization could be subject to penalty excise taxes, and the organization could lose its tax-exempt status. For example, entering a contract with a board member’s business without soliciting bids from other businesses to determine whether the organization could obtain a better deal elsewhere could be considered benefitting an insider.
Gift Cards to Thank Volunteers (STRONGLY Discouraged):
According to the 2021 PTA & the Law handbook: “The generally accepted definition of a volunteer is someone who contributes their time without being paid for the services rendered. Reimbursement for expenses will not constitute wages. Likewise, providing an occasional meal or similar benefit will not constitute wages. Be aware that the IRS warns that thanking volunteers for performing volunteer duties by giving them a gift card can be seen as wages in another form, and thereby, ‘volunteers’ may be considered employees.”
Cash gifts and gift cards that are given for volunteering (in any amount) are treated by the IRS like a stipend or other type of compensation—so while they are allowed in a nominal amount, they are considered taxable income by the IRS. Volunteers are required to report them as taxable income, and the PTA is required to pay taxes and FICA on the amount given, just as they would if they were paying an employee. PTAs are encouraged to find alternate ways of thanking volunteers: a shout-out in your newsletter, a personal note of thanks, a spotlight of appreciation on your social media, etc.
Gift Cards to Appreciate Staff (Discouraged):
LWSD allows parents, community groups, vendors and contract service groups to provide gifts of minimal value to district employees. While LWSD allows staff to accept a gift < $50, WSPTA recommends that PTAs limit gift cards to < $25. In addition, LWSD policy states that no preferential treatment can be derived from the exchange. If a staff member believes that an accepted gift could be an exchange for preferential treatment, they are to return the gift and report the situation to their immediate supervisor.
Gift Cards to Help Families Experiencing Financial Hardship (Alternate Ways of Support Encouraged):
Private benefit is prohibited, so PTAs should ensure that an insubstantial amount of their resources (both time and money) are committed to such an activity. PTAs must create a clear, written process for handling gift cards. Include the process for receiving and logging a gift card, where gift cards are stored, who has access to the cards, and the process for distributing cards or checking out a card and submitting receipts.
Gift card donations should be handled like cash donations. The PTA should give the donor a cash receipt, must keep a record of each donation, and track the funds as donation income in bookkeeping. Best practice would be to track gift cards as a separate, restricted fund, and to include this report in the monthly financial reports. Likewise, when cards are distributed, those funds must also appear in the PTA bookkeeping. If the PTA is using donated gift cards to purchase items that are then distributed, there should also be a system in place to ensure that all items purchased are accounted for.
PTAs should also respect the privacy of the families. LWSD staff may not handle gift cards at any time, and counselors may not share their “Free/Reduced Lunch” lists with PTA.
PTAs may host food drives, giving trees, coat drives, etc. where the giving involves items (food, coats, gifts), not cash/gift cards, while still being mindful of PTA restrictions around private benefit and LWSD’s restrictions around the use of “Free/Reduced Lunch” lists.
PTAs can donate funds or goods to a local nonprofit whose mission is to support families who are experiencing financial hardship. This can be achieved by encouraging direct donations to the chosen nonprofit or sponsoring a food drive, coat drive, etc., and then donating the goods/cash to the chosen nonprofit. It is recommended that PTAs check with their chosen nonprofit to find out how best to support their efforts before starting a donation collection.
PTAs can also advertise that they are sponsoring a gift card drive, and invite families who would like to benefit to notify the PTA. Please note that there are limitations around what school counselors may use the Free/Reduced Lunch lists for (beyond providing school meals), so counselors may not share those lists with PTA, but counselors may help spread the word about the gift card drive within the school community.
Whether PTAs choose to collect physical gift cards or restricted funds to purchase gift cards, careful tracking needs to occur—from the receipt to the storage and the distribution of the gift cards. No LWSD staff may handle the gift cards at any time during the collection, storage or distribution phases of the gift card drive. All handling of gift cards should be done by PTA volunteers.
Gift Cards as Door Prizes or Event Prizes (Acceptable With Proper Accountability):
PTAs are often looking for incentives for a variety of actions that help support the PTA mission. Joining the PTA, attending membership meetings, participating in fundraising events, and educational enrichment activities (math contests, spelling bees, etc) are just some examples. If a PTA wants to use a low-value gift card as a door prize for attending an event, or as the prize for a student contest, that is acceptable. It should be a clear part of the Committee Plan of Action for that event, and included in the approved budget (whether the gift card is purchased with PTA funds or an expected donation). As mentioned above, the acquisition, storage and distribution of the gift card should be documented for bookkeeping purposes.