As a tax-exempt entity, you are provided with the privilege of receiving charitable donations from the general public; however you are also responsible for complying with federal laws applicable to charities and churches that receive such tax-deductible donations. These rules exist for not-for-profit entities in order to facilitate the strict recordkeeping and substantiation requirements imposed on donors, in order to receive a tax deduction on his/her federal income tax return.
Rules for donors: A donor must have a bank record or written communication from a charity for any contribution before taking a tax deduction. A donor is responsible for obtaining a written acknowledgement from a charity for any single donation of $250 or more. For in-kind donations, the donor is responsible for obtaining/assigning the fair market value of the donated item.
Written Acknowledgements for gifts over $250
While this requirement is technically the donor’s responsibility, the donor may not claim a tax deduction without this written acknowledgement. Therefore, to best serve its generous supporters, the organization should provide a timely statement containing the following information:
- Name of Organization
- Amount of cash contribution
- Description (but NOT the fair value) of non-cash donations
- Statement that no goods or services were provided by the organization in return for the contribution (if that is a factual statement)
- Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution (commonly referred to as “Quid Pro Quo” – see below)
- All acknowledgements should be contemporaneous – typically no later than January 31st of the calendar year following the donation. Best practice would be to provide this acknowledgement within 30 days of receiving the gift.
Written Disclosure for Quid Pro Quo
When a charity provides any goods or services in exchange for a donation, this is partly an exchange transaction and partly a contribution. A donor may only take a contribution deduction to the extent that the contribution exceeds the fair market value of the goods or services received. It is the organization’s responsibility to provide the estimated fair market value, which must be in writing if the original payment exceeds $75. Penalties may be assessed if an organization does not meet the written disclosure requirement. The penalty is $10 per contribution, not to exceed $5,000 per fundraising event or mailing.
The written disclosure statement must:
- Inform the donor that the amount of the contribution that is eligible for deduction for federal income tax purposes is limited to the excess of money (and fair market value of property other than money) contributed by the donor over the value of goods and services provided by the organization.
- Provide the donor with a good-faith estimate of the fair value of the goods or services provided by the organization.
- Be in writing and be made in a manner that is likely to come to the attention of the donor. The statement may be included in the solicitation of the donation or provided along with a receipt of the donation.
There are exceptions for certain “token gifts” and “intangible religious benefits” which are received by the donor in exchange of gifts, in which case written acknowledgements are not required.
- Unreimbursed expenses may be another form of contribution, such as out of pocket transportation expenses in order to perform donated services or provided supplies for a program activity. In this case, the donor must obtain a written acknowledgement from the organization containing the same information listed above for donations over $250, except it also should include a description of the goods or services provided by the donor.
- Non-cash donations with claimed fair market value greater than $5,000 generally require a qualified appraisal, which is the responsibility of the donor, not the charity.
Jeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.