The holiday season is a time when many people donate to various charitable organizations. Individuals typically provide donations in the form of monetary or donated property. These contributions benefit the charitable organization and also provide a tax deduction to the donor. In order for this tax deduction to be allowed, the IRS has specific requirements for the charitable organization to follow. Do you know what all of the requirements are? Acknowledging donations is not only required by the IRS, but also provides a means for an organization to say ‘thank you.’
There are many ways in which an individual can donate to a charitable organization. We will focus our discussion on two main ways: monetary and property.
The IRS requires a donor to maintain a record of their contribution or a written communication from the charity in order for the amount to be deducted on their individual tax return. A record of their contribution could be in the form of cancelled check or, for payroll deductions, a pay stub or other employer-furnished document showing the amount withheld. If a donor makes a single contribution greater than $250, written communication from the charity is required.
Individuals who donate property are allowed to deduct the fair market value of such property as of the date of the donation. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Donated property can range from clothing and toys to vehicles, artwork or land. The value of the property is the responsibility of the donor for purposes of determining the amount of the deduction. The charitable organization should always provide acknowledgements; however, the acknowledgement should never include an estimated fair market value. Special rules apply to donated vehicles.
The following items are required to be included in the written communication from the charity:
- Name of the organization, including a statement that the organization is a charity recognized as tax-exempt by the IRS under Section 501(c)(3).
- Date of the donation.
- Acknowledge the amount.
- If cash, include the amount received.
- If donated property, include a description (but not the value) of the non-cash contribution. The value of the non-cash contribution is the donor’s responsibility. For example:
Thank you for the 200 shares of IBM stock donated on December 31, 2016.
- Statement that no goods or services were provided by the organization in return for the contribution, if that was the case.
- If any goods or services were provided (referred to as a quid pro quo contribution), include a description and good faith estimate of the value of the goods or services. For example, an individual paid $100 to attend an annual gala event, to include dinner. (See exceptions to this rule outlined below.) The acknowledgement could state:
For federal income tax purposes, you can deduct as a charitable contribution the price of this ticket less its fair market value. We estimate the fair market value of this ticket to be $40 (i.e. the cost of the dinner provided), so your charitable contribution is $60.
A penalty is imposed on a charity that does not make the required disclosure in connection with a quid pro quo contribution of more than $75. The penalty is $10 per contribution, not to exceed $5,000 per fund-raising event or mailing.
The following summarizes some of the other nuances of these requirements:
- Acknowledgement is required for each donation greater than $250. In lieu of this, the charity can provide an annual statement of all giving.
- Acknowledgements are typically sent to donors no later than January 31st of the year following the donation. A donor must receive acknowledgement by the earlier of: the date the donor files his/her tax return or the due date of the extended tax return in order for the individual to deduct the contribution.
- Although no financial penalty to the charitable organization exists for not providing the written acknowledgement, there could be a financial or public relations impact if the donor was unable to deduct the donation on their tax return and then, consequently, decides not to donate again.
- Acknowledgements can be provided in written format, such as letters, postcards or computer-generated forms, or they can be provided electronically.
- What are the requirements if a donor requests not to be reimbursed for an expense? Is that considered a charitable contribution? The rules are the same as above. For example, a committee member elects to pay his/her own way to a conference for the benefit of the charitable organization. The donor should receive a written acknowledgement of this donation. As it was a noncash donation, only a description would be provided in the acknowledgement.
- There are a few exceptions to providing the fair value of goods or services received. See those exceptions outlined below:
A. Token Exception – Insubstantial goods or services provided by a charitable organization in exchange for contributions do not need to be reported. The amount considered insubstantial is adjusted for inflation each year. For 2016, to qualify as token goods or services, they must cost the organization no more than $10.60, and the contribution received must have been at least $53.
For example, if a charitable organization gives a water bottle with its logo and that cost is less than $10.60, the organization does not need to provide a statement with the fair value of the goods or services received for donors who contributed more than $53. The individual would receive the full $53 deduction on their tax return.
B. Membership Benefits Exception – An annual membership benefit is also considered insubstantial when provided in exchange for an annual payment of $75 or less and consisting of annual rights and privileges, such as allowing free admission to workshops.
If your organization has any specific questions regarding acknowledgements to donors, please contact one of our non-profit specialists.