Does your nonprofit organization and its donors understand the IRS requirements surrounding charitable donations?
A nonprofit organization that does not understand the details of the IRS requirements, is not able to effectively communicate to donors, or provide donors with accurate and appropriate documentation, can risk alienating donors. In addition, an organization could potentially miss an opportunity to increase donor giving levels and on the flip side, could be exposed to monetary penalties.
To promote charitable giving, the IRS allows for tax deductions for contributions of cash or other monetary and non-monetary gifts as long as certain recordkeeping requirements are met.
Folks can generally only deduct charitable donations to qualified organizations, such as places of worship and nonprofit organizations/hospitals (i.e., Colleges, United Way, Girl Scouts). If you're not sure that the organization you plan on making a donation to qualifies, ask them, or you can check the following website: (www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check). Keep in mind that you cannot obtain a charitable donation deduction for contributions to individuals, or for the value of your time or services provided to an organization.
Once you've determined that the organization is qualified, you need to make sure that you're going to obtain a tax benefit by making the donation. If you don't itemize your deductions (file a Schedule A), you will not have the ability to deduct the amount donated. Also, you cannot (generally) deduct charitable contributions that exceed 50% of your Adjusted Gross Income ("A.G.I."). Finally, if you’re A.G.I. is above a certain threshold (in 2016, $311,300 if you file jointly, $259,400 if you file as a single taxpayer), your total charitable contributions, as well as your other itemized deductions (i.e., real estate taxes, mortgage interest) may be limited.
Let’s take a look:
Monetary gifts (cash, checks, payroll deductions, stock gifts, etc.)
To validate a deduction taken for a charitable contribution of any amount, the taxpayer (the one claiming the deduction on their tax return) must have:
- A bank record or a written communication from the charity displaying the name of the organization
- The amount of the contribution and,
- The date of the contribution.
Often, such contributions are made through payroll deductions to or facilitated by organizations such as the United Way. In these instances, the taxpayer must maintain a pay stub or Form W-2. The taxpayer may also furnish another employer-generated document that details the amount(s) withheld for payment to the charitable organization, along with a pledge card filled in by or at the direction of the donee charitable organization. These basic documentation rules apply to all gifts unless a gift individually exceeds $250.
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Additional requirements for gifts of $250 or more state that the taxpayer must obtain:
- A written acknowledgement of the contribution from the donee organization that stipulates the amount of cash and a description of any property other than cash contributed
- The taxpayer must obtain a statement whether the organization provided any goods or services in consideration for the contribution
- A description and good faith estimate of the value of any goods or services provided in consideration for the contribution
Keep in mind that for payroll deductions, the IRS states that the contribution amount withheld from each paycheck to a taxpayer is treated as a separate contribution for purposes of applying the $250 threshold. To illustrate, 15 payroll deductions of $20 each, totaling $300 over the course of the year would not be considered to meet the additional requirements threshold of $250.
This acknowledgment must be obtained by the donor no later than the date that the donor actually files their tax return for the year in which the donation was made.
Non-Monetary Donations (property, auction items, food, etc.)
Non-cash donations have different requirements and many exceptions to those requirements. At a minimum, the charity should provide an acknowledgement for the receipt of a gift with an estimated value of $250 or more containing the following:
- A description of property transferred to the charity (it is the donor's responsibility to value the property)
- A statement of whether the charity provided any goods or services in return for the gift and
- If the charity did provide goods in return for the gift, then a description and good faith estimate of the value of those goods or services
When a charity provides a good or service in exchange for a donation of more than $75, the charity must provide a written disclosure to the donor stating the fair market value (FMV) of the goods and services provided, and inform the donor that only the portion of the contribution that exceeds this FMV is tax deductible. Failure to make such a disclosure can come with a penalty of $10 per contribution, not to exceed $5,000 per fundraising event or mailing. The charity can avoid the penalty if it can show that the failure was due to reasonable cause.
Determining FMV can be difficult, but is important because the IRS only allows a charitable deduction when a payment to a charity exceeds the FMV of the goods or services received; otherwise there is no gift and no deduction. Whether you’re figuring out if an item has an insubstantial value or if you’re trying to inform a donor about how much they may legally deduct as a gift, you must be able to determine the FMV. Generally, the charity’s good faith estimate of the value of goods or services will be treated as the FMV, and a donor may rely on that estimate except when the donor knows the estimate is unreasonable. The following are some examples:
- Meal and Entertainment Events –These types of charitable events, such as an annual gala, are very common. The FMV is estimated at how much that evening would cost someone if they were to go out and purchase a comparable experience at a commercial establishment. Remember, the FMV is not the cost to your organization. If you are running an event as a fundraising event and the space, food, printing, and entertainment are all donated, the FMV is not $0.
- Raffles – Raffle tickets are never deductible as contributions. The person purchasing the raffle ticket has bought an opportunity to win something and the FMV of that opportunity is the price they paid for the ticket.
- Goods/Services Not Commercially Available – Examples in this category include personal services performed for the donor. A common example would be a local chef coming to the donor’s home and providing the food to prepare a dinner for a group in the donor’s kitchen. To assess the FMV in these types of cases, you may make a good faith estimate using closely comparable items.
- Auctions – Auctions can be complicated; if there is a catalog of items including the organization’s estimates of FMV and that catalog is distributed to potential bidders before the auction, then generally the purchaser may deduct, as a charitable donation, the amount paid above the stated FMV of the items. If there is no prior notice or estimate of the FMV of the item, the IRS likely will assume that the FMV of the item is what was paid for it and none of the payment will be considered as a deductible contribution.
- Celebrity Appearances – The determining factor here is whether the celebrity is actually doing what he or she is primarily famous for. For example, if a famous comedian gives a performance to benefit your organization, then the FMV of the ticket is what a ticket to see the comedian perform would ordinarily cost. The donor may only deduct the portion of the purchase price that exceeds that FMV. However, if the same celebrity is merely appearing to tell a personal story at an event or meet and mingle with guests and is not performing, there is no FMV associated with the celebrity’s appearance.
These rules are logical. The IRS is trying to treat transactions that are truly sales as such; to not give non-profit organizations the unfair advantage of selling goods or service tax-free when commercial establishments cannot sell the same goods or services tax free.
Exceptions to Disclosure Requirements
There are certain circumstances where the nonprofit organization can forgo disclosing the FMV of goods or services in exchange for a donation, but the FMV or in some cases the cost, still need to be determined to be able to know when the nonprofit organization can disregard disclosure requirements. The two most common situations are:
Low Cost Articles – Goods or services that have “insubstantial value” as defined by the IRS, are considered fully deductible and need not be disclosed by the charitable organization. These items are known as “low cost articles”. Typical examples of low cost articles are; coffee mugs, calendars, pens, trinkets, etc.
Low cost articles are subject to thresholds that are adjusted annually for inflation. For calendar year 2016, “low cost articles” are defined as items whose FMV is not more than 2% of the donor’s payment or $106, whichever is less; or when the payment is at least $53 and the only benefits received are items such as coffee mugs, calendars, pens, trinkets, etc., showing the organization’s logo or name. These items are determined to be “low cost articles” if their cost (as opposed to their FMV) does not exceed $10.60, in the aggregate, for all items received by the donor during that year.
Membership Benefits – Some non-profit organizations, for a set cost, offer memberships that are accompanied with member benefits. The IRS allows nonprofits to disregard disclosure requirements for two types of member benefits that are often offered to donors in exchange for membership payments:
- When a membership costs $75 or less, there is no need to disclose the value of free admission to members-only events, if the cost per person attending each event is within the limits established for “low cost articles” described previously, and where the rights or privileges can be exercised frequently during the membership period. Examples of these include discounts offered by a charity for purchasers from commercial retailers working with the charity to provide discounts to members; the right to purchase tickets to an artistic (non-sports) performance before they go on sale to the public in general; free admission to conferences offered only to members; or free parking at the organization’s events.
- Another membership benefit that is typically allowed to not be disclosed is a newsletter or program guide, if the newsletter or program guide is not of commercial quality; does not have a measurable FMV and its primary purpose is to inform members about the activities of the organization. These types of newsletters or publications also cannot be available to non-members by paid subscription or newsstand sales.
In the cases described above, as low cost articles and allowable member benefits, the full amount of the payment is deductible as a gift by the donor and the organization does not have to disclose any FMV for the item or services received.
The proper determination described within this article can be confusing, especially for the first time; in addition there are more complex circumstances and situations that may factor into the above guidelines.
For more information on charitable deductions for nonprofits and donors or if you have questions regarding this topic, please contact me at email@example.com or 216.831.0733. I am happy to help and am ready to start the conversation.