With the widespread use of technology to make donations and other banking transactions easier, many organizations will soon have to face this issue. Fortunately, application of accounting principles will lead to an understanding of the correct treatment from the perspective of both the donor and the charitable organization.
A charitable organization accepting donations through PayPal should use revenue recognition principles consistent with those employed in any other situation. Therefore, in order to accurately reflect the details of the situation and the intent of the donor, the full amount of the contribution should be recognized as income. The service fee should then be recorded as an expense. For example: a donor wishes to contribute $100 towards a qualified organization. If PayPal charges a 5% fee, the organization will record $100 of income and an expense of $5. This results in a $95 net cash increase and an accurate reflection of the physical events of the transaction.
Based on this treatment, a donor who gives through PayPal will be able to deduct the entire amount of the contribution, disregarding the service fee. Because the fee is a cost incurred by the organization, the $5 of his donation that covers the fee has been used for the benefit of the organization just as much as the $95 that is left for other use. The organization's choice to facilitate contributions through PayPal has no bearing on the deductibility of the donor's gift.