Well, you screwed up by selling shirts. If it was just cash donations, it would be easy. Because you provided a product, you have a problem.
With respect to no-string-attached cash donations, the money is not taxable to you even if it is received in an account in your name and you get a 1099-K. You just have to make sure that you don't tell anyone that the money is a deductible charitable donation or a deductible medical expense. (Donations are not deductible when made for the benefit of one specific person, even if they are needy, and a taxpayer can only deduct medical expenses they pay for themselves, a spouse or a dependent. As long as you did not make any misleading statements about deductions, you are find on the gift angle.) There is a way to deal with this kind of situation where people make gifts to your account and then you transfer those gifts to the ultimate recipient.
However, if you were providing goods or services in return for money (the shirts) that makes it look much more like self-employment. Viewed strictly as a business, you must report the income from the shirts as table income on schedule C, you can deduct your expenses, and pay tax on the net profit. However, giving the profit to your friend is a free gift after paying taxes on the profit, it is not an expense that can be used to negate the taxable profit. It;s possible the IRS would look leniently on this kind of thing, especially if you have the records, but I can't promise that they would overlook this.
Also, that word "we" raises red flags because you if you have a business with someone else who is not your spouse, that requires a different kind of tax return, and can run into more problems.
You should probably discuss this with a tax professional in your area.
