Acknowledging Charitable Contributions

Nonprofits are sending thank you notes to donors, but many times they are not using the magic words. That is what was reported by a tax attorney speaking to the Wall Street Journal. The story advised philanthropic readers that IRS auditors may deny a deduction if the charity’s acknowledgment letter does not contain the prescribed information. There is often considerable confusion about how to comply.

In her highly recommended book, The Charity’s Guide To Charitable Contributions, Pamela McAllister gives four reasons why charities should take the time to learn the rules governing federal income tax deductions for charitable contributions:

1. Charities are being held accountable as never before and must always operate in a businesslike manner.

2. Fund raising is becoming increasingly difficult and competitive. Donors stay happy when they are given accurate information.

3. The IRS can impose penalties if its rules are ignored.

4. The charitable community’s reputation will benefit from reducing abuse, making the possibility for favorable legislation more likely.

McAllister also outlines two fundamental principles:

First, a deduction is allowed only when the contribution is a gift. When the donor receives goods or services in exchange for the contribution, the deduction is limited to the amount of the contribution minus the value of the goods or services received.

Second, while it is up to the donors to document their contributions to the satisfaction of the IRS, charitable organizations play an important role in helping their donors meet this burden:

Cash Contributions

Taxpayers who deduct donations of $250 or more on Schedule A of their 1040 federal tax returns must have a written acknowledgment from the charitable organization. A cancelled check alone is no longer sufficient verification.

Organizations are required to provide timely written disclosure statements. Separate acknowledgements for each contribution or a cumulative annual statement that lists each donation are acceptable. The written acknowledgement should be dated and may be in the form of a letter, postcard or computer generated form. Acknowledgments should state the dollar amount of the gift and a statement – those magic words – that no goods or services were provided.

Quid Pro Quo

Tax-exempt organizations that receive donations in excess of $75 in which part of the contribution is a gift and part is in return for goods and services, must give the donor a receipt detailing how much of the “quid pro quo” contribution is a gift (deductible) and how much is in exchange for goods and services such as meals, entertainment or books (non-deductible)

Good Faith Estimates

An organization may use any reasonable methodology in making a good faith estimate of the value of goods or services.

Advance notice on solicitation materials, such as a reply card for a fund raising dinner, does not satisfy the receipt requirement. Most organizations do include a breakdown on the invitation to educate their donors and ensure that solicitations are not misleading or ambiguous.

Example: Tickets for a fund raising luncheon cost $50. The reply card states, “Contributions over the value of the luncheon ($25) are tax deductible.” It is no longer sufficient to say “The price of this ticket is deductible to the full extent of the law.” Small print should be avoided to ensure that the donor can read the disclosure statement.

Token Thank You Gifts

Under certain conditions, small items are considered so insubstantial by the IRS that donors may be advised that the full amount of their donations are deductible. Low cost items such as key chains, book marks and mugs bearing the organizations name or logo can generally be disregarded if the contribution is at least $37 and the organization’s total cost of the premium is not more than $7.40.

Raffle Tickets

The cost of raffle tickets purchased from a charitable organization is not deductible. Raffle tickets should never include any misleading language such as “$5.00 donation”.

Auctions

Deductions for items purchased at auctions sponsored by charitable organizations are limited to the excess of the amount paid for the items over the fair market value.

Example: Taxpayer attends an auction held by a charity. Prior to the auction, the organization publishes a catalog that includes the good faith estimate of the value of the items that will be available for bidding. It gives a copy to each individual who attends the auction. Taxpayer notes that in the catalog the charity’s estimate of the value of a vase is $100. Tax payer has no reason to doubt the accuracy of this estimate. Taxpayer successfully bids and pays $500 for the vase. Because taxpayer knew, prior to making her payment that the estimate in the catalog was less than the amount of the payment, she may deduct $400.

Non Cash Gifts

The rules governing gifts of property such as office equipment, furniture, stocks and bonds, or real estate are complicated and organizations should never give donors tax advice. The deductibility of these items should always be confirmed with a professional tax advisor.

Resource:

www.irs.ustreas.gov