Happy Giving Tuesday! As charities everywhere encourage donors to spread an attitude of gratitude, end-of-year duties are quickly approaching. Nonprofits that accept charitable contributions also accept a responsibility to provide sufficient documentation for donors to claim a tax deduction for donations of money and goods.
Charities are required to provide written acknowledgement for any donation of $250 or more per IRS rules. However, it’s a courtesy to provide an acknowledgement letter for any donation since donors must retain some form of substantiation for all donations they claim as a tax deduction. To comply with IRS rules for proper documentation, the acknowledgement letter must include several key elements: name of the charitable organization, amount of the monetary contribution (or description of the goods/services donated), a statement that no goods or services were provided by the charity in exchange for the contribution (or an estimate of the value of goods/services provided to the donor in connection with the contribution).
Even some fundraiser event tickets and other payments to charities require acknowledgement. If the ticket price or other payment for goods or services exceeds $75 each, the charity is required to provide written disclosure of the fair value of the goods and/or services received. For example, if a fundraiser dinner ticket costs $100 and ticket holders are entitled to a dinner and concert, the charitable organization must estimate the value of the dinner and concert so that the donor knows what portion of the ticket was a charitable donation. If the organization determines that the value of the dinner and concert was $40, the ticket purchaser has made a $60 donation ($100 – $40). Even if tickets cost $75 or less, the organization should estimate the value versus contribution portion of tickets and sponsorships since they will generally need to separate these types of revenue on Form 990. Sponsorships may have a donative element as well. If a $1,000 sponsor receives two free tickets to the event, that sponsor has received something of value that needs to be disclosed to them. Please note that raffle ticket purchases generally are not charitable contributions – they are a form of gambling where the value received is the chance to win a prize.
Several recent court cases highlight the importance of the simple statement that no goods or services were provided in exchange for the contribution. Without this statement, the IRS will assume that the full payment was for value received by the donor and that donor will not be entitled to a charitable donation tax deduction. Organizations can easily lose large donors if the acknowledgement letters do not include all required elements.
Although charities must estimate the value provided to donors, they should not estimate the value of items they receive from donors. The donor is responsible for estimating the value, although the charity may be asked to sign IRS Form 8283 if the donor is claiming a tax deduction in excess of $5,000. In this case, the charity is only acknowledging they received the gift, not that they agree with the valuation. Organizations are not bound by the donor’s valuation, but they do need to determine a value so that the contribution can be recorded for accounting purposes. The value of all donations should be included in the financials to provide a complete picture of the support received by the organization and recognize the cost that would otherwise have been incurred if not for the donated goods/services.
Acknowledgement letters generally must be provided by January 31 each year for the previous calendar year so that donors can prepare timely tax returns. Court cases have ruled that acknowledgement letters sent after the due date for a timely filed tax return are not contemporaneous and will not be considered proper acknowledgement for a tax deduction.
Start reviewing your records now so that your organization can fully comply with the IRS requirements and maintain happy donors.
