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Acknowledging Charitable Contributions: What Nonprofits Need to Know
Many nonprofits report a substantial boost in charitable donations during the last three months of the year, with some groups receiving as much as half of their yearly donation totals during that period. As the end of 2014 approaches, organizations should make it a priority to ensure that donors receive timely, accurate acknowledgments of their contributions and that the organization complies with Internal Revenue Service requirements regarding written disclosure for quid pro quo contributions.
I. Federal Law and Tax Deductions
Under the Internal Revenue Code, a donor may claim a tax deduction for any single contribution of $250 or more, only if the donor receives from the recipient organization a contemporaneous, written acknowledgment of the contribution. A recipient organization is not required by law to provide this acknowledgment to the donor; however, the donor cannot claim the deduction without it. To be considered contemporaneous with the contribution, a written acknowledgment must be received by the donor by the earlier of:
- The date on which the donor files his or her individual federal income tax return for the year of the contribution; or
- The due date (including extensions) of the return.
A written acknowledgment may take a variety of forms, including a letter, postcard, computer-generated form, or email message. The IRS does not require a standard form. Organizations may provide a separate acknowledgment for each single contribution of $250 or more, or may provide one acknowledgment (such as an annual summary) to substantiate several single contributions of $250 or more. Consequently, many nonprofits send written acknowledgments to donors no later than January 31 of the year following the donation, listing all donations made during the prior year.
The acknowledgment must include:
- The name of the organization;
- The amount of any cash contribution;
- A detailed description (but not the value, which is up to the donor to determine) of any non-cash contributions; and
- Whichever of the following applies:
- 1. A statement that no goods or services were provided by the organization in return for the contribution (if applicable);
- 2. A description and good-faith estimate of the value of any goods and services provided by the organization in return for a contribution (if applicable); or
- 3. A statement that any goods or services that an organization provided in return for the contribution consisted entirely of intangible religious benefits (if applicable).
Examples of Written Acknowledgments:
"Thank you for your cash contribution of $300 that (Organization) received on November 4, 2014. No goods or services were provided in exchange for your contribution."
"Thank you for your contribution of a used sofa and matching chairs that (Organization) received on March 15, 2014. No goods or services were provided in exchange for your contribution."
The following is an example of a written acknowledgment where a charity accepts contributions in the name of one of its activities: "Thank you for your contribution of $250 to (Organization) made in the name of its Kids & Families program. No goods or services were provided in exchange for your donation."
II. Goods and Services: Quid Pro Quo Contributions
When an organization provides goods and services in exchange for a contribution (for example, when a nonprofit holds a fundraising event at which food and drinks are provided to guests in exchange for paying an entrance fee), this is called a quid pro quo contribution. When a donor makes a quid pro quo contribution of $250 or more, the recipient organization's written acknowledgment must include a description of the goods and services the organization provided, along with a good-faith estimate of the fair market value of the goods or services. (The organization must provide a written disclosure to the donor for any quid pro quo contribution that exceeds $75; see "Quid Pro Quo Contributions - Written Disclosure" below). The estimate is important, because the donor must reduce the amount of the contribution deduction by the value of the goods and services provided.
Quid Pro Quo Contributions - Written Disclosure: "Thank you for your cash contribution of $600 that (Organization) received on April 13, 2014. In exchange for your contribution, we have you a framed picture with an estimated fair market value of $60."
Goods or services can include cash, property, services, benefits or privileges. However, there are several important exceptions:
Token Exception: Insubstantial goods or services provided in exchange for contributions need not be described in the acknowledgment. Goods and services are considered insubstantial if the donor pays for them in the context of a fund-raising campaign in which a charitable organization informs the donor of the amount of the contribution that is a deductible contribution, and:
- The fair market value of the benefits received does not exceed the lesser of 2 percent of the payment or $104; or
- The payment is at least $52, the only items provided bear the organization's name or logo (e.g., calendars, mugs, or posters), and the cost of these items is within the limit for "low-cost articles," which is $10.40.
The dollar amounts are adjusted annually. Free, low-cost articles that the donor did not order are also considered to be insubstantial.
Example of a token exception: If a charitable organization gives a T-shirt bearing its logo that costs the organization $10.40 or less to a donor who contributes $52 or more, the organization may state that no goods or services were provided in return for the $52 contribution. The $52 is fully deductible.
Membership Benefits Exception: An annual membership benefit that is provided in exchange for an annual payment of $75 or less, and consists of annual recurring rights or privileges, is also considered insubstantial.
Examples of annual, recurring rights or privileges include:
- Free or discounted admissions to the charitable organization's facilities or events;
- Discounts on purchases from the organization's gift shop;
- Free or discounted parking; and
- Free or discounted admission to member-only events sponsored by an organization, where a per-person cost (not including overhead) is within the "low-cost articles" limits.
Example of a membership benefits exception: If a charitable organization offers a $75 annual membership that permits free admission to all of its weekly events, plus a $20 coffee mug, a written acknowledgment need only mention the $20 value of the coffee mug, since the free admission would be considered insubstantial and therefore would be disregarded.
Intangible Religious Benefits Exception: If a religious organization provides only "intangible religious benefits" to a contributor, the acknowledgment need not describe the benefits or assign them a value, but need only state that the organization provided intangible religious benefits.
"Intangible religious benefits" are benefits provided by a tax-exempt organization operated exclusively for religious purposes and not usually sold in commercial transactions outside a gift context. Examples include admission to a religious ceremony and a de minimis tangible benefit, such as wine used in a religious ceremony.
Benefits that are not intangible religious benefits include education leading to a recognized degree, travel services, and consumer goods.
III. Quid Pro Quo Contributions: Written Disclosure
Since donors may only take contribution deductions to the extent that their contributions exceed the fair market value of the goods or services they receive in return for the contribution, donors needs to know the value of the goods or services. An organization must furnish a written disclosure statement to a donor who makes a payment exceeding $75 partly as a contribution and partly for goods and services provided by the organization.
Example of a quid pro quo contribution where a disclosure statement is required: A donor gives a charitable organization $100 in exchange for a football game ticket with a fair market value of $40. In this example, the donor's tax deduction may not exceed $60. Because the donor's payment (quid pro quo contribution) exceeds $75, the charitable organization must provide a disclosure statement to the donor, even though the deductible amount does not exceed $75.
A written disclosure statement must:
- Inform a donor that the contribution amount that is deductible for federal income tax purposes is limited to the excess of money (and the fair market value of property other than money) contributed by the donor over the value of goods or services provided by the organization; and
- Provide a donor with a good-faith estimate of the fair market value of the goods or services.
An organization must furnish a disclosure statement either at the time it solicits the quid pro quo contribution or at the time it receives the contribution. In addition to being in writing, the disclosure must be provided in a manner likely to come to the attention of the donor. For example, a disclosure furnished inconspicuously, in small print within a large document, might not meet this requirement.
A written disclosure statement is not required where the goods or services given to a donor meet the token exception, the membership benefits exception, or the intangible religious benefits exception, or where there is no donative element involved in a particular transaction, such as in the purchase of an item from a museum gift shop.
Penalty: Charities that do not meet the written disclosure requirement are subject to a penalty of $10 per contribution, up to $5,000 per fundraising event or mailing. If an organization can show that failure to meet the requirements was due to "reasonable cause," it may avoid the penalty.
IV. Unreimbursed Expenses
If a donor makes a single contribution of $250 or more in the form of unreimbursed expenses, such as out-of-pocket meal costs incurred while performing donated services for an organization, then the donor must obtain a written acknowledgment from the organization that contains:
- A description of the services provided by the donor;
- A statement of whether or not the organization provided goods or services in return for the contribution;
- A description and good-faith estimate of the value of any goods or services that the organization provided in return for the contribution;
- If applicable, a statement that any goods or services that the organization provided in return for the contribution consisted entirely of intangible religious benefits.
Example of an unreimbursed expense: A board member of a charitable organization purchases a train ticket to travel to a convention, which he will attend on the organization's behalf. The organization does not reimburse the board member for the $300 ticket. The board member should keep a record of the expenditure, such as the ticket stub, and should obtain from the organization a description of the services that the board member provided and a statement that the board member received no goods or services from the organization.
For more information, see the IRS website on Tax Information and Charitable Organizations.
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