Last Reviewed/Updated 01/3/17
Internal Revenue Service regulations regarding substantiation and disclosure requirements for tax-deductible donations to charity have been in place for many years, and some date back to 1967. However, these guidelines can be far from clear when non-profit managers and fundraisers attempt to apply them in the real world. This article will provide an overview of the more typical questions that arise as charities work through the disclosure and substantiation process.
Taxpayers claiming charitable contribution deductions for cash, check, or other monetary gifts must adhere to a series of recordkeeping requirements in order to claim a deduction for the gift.
To substantiate a deduction for contributions of any amount, a taxpayer must maintain a bank record or a written communication from the charity showing the name of the organization, the date of the contribution, and the amount of the contribution. For a charitable contribution made by payroll deduction, a pay stub, Form W-2, or other employer-furnished document that sets forth the amount withheld for payment to the organization, along with a pledge card prepared by or at the direction of the donee organization, will be deemed to be a "written communication from the donee organization" that satisfies the requirements (see below for information about payroll deductions of $250 or more).
Additional substantiation requirements remain in effect for contributions of $250 or more, whether made directly or through payroll deduction. For any contribution of $250 or more, in order for a donor to be able to claim a charitable deduction, s/he must written acknowledgment of the contribution from the donee organization which includes the amount of cash and a description of any property other than cash contributed; a statement whether the organization provided any goods or services in consideration for the contribution; and a description and good faith estimate of the value of any goods or services provided in consideration for the contribution, or, if the goods or services consist solely of intangible religious benefits, a statement to that effect. This acknowledgment from the charity must be "contemporaneous" - obtained by the donor no later than the date the donor actually files his/her tax return for the year in which the donation was made.
To substantiate a contribution of $250 or more made by payroll deduction, the pledge card or other document prepared by the donee organization also must include a statement to the effect that the organization does not provide goods or services in whole or partial consideration for any contributions made to the organization by payroll deduction. IRS guidelines state that the contribution amount withheld from each payment of wages to a taxpayer is treated as a separate contribution for purposes of applying the $250 threshold in § 170(f)(8) to charitable contributions made by payroll deduction; in other words, 10 payroll deductions of $25 each, totaling $250 over the year, do not trigger the extra substantiation requirement.
More information is available on the IRS Web site at http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Charitable-Organizations-Substantiation-and-Disclosure-Requirements.
There are additional requirements depending on the estimated value of the gift and the nature of the non-cash donation. For more information, consult the following publications, all available from the IRS Web site: IRS Publication 526, “Charitable Contributions;” IRS Publication 561, “Determining the Value of Donated Property;” IRS Publication 1771, “Charitable Contributions: Substantiation and Disclosure Requirements;” and IRS Publication 4302, “A Charity’s Guide to Vehicle Donations.”
In addition to the requirements for documenting cash contributions described above, 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 setting out the fair market value of the goods and services received, and informing the donor that only the portion of the contribution that exceeds this fair market value is tax deductible.
The two most frequently asked questions are: “When do I have to disclose the value of something received in exchange for a donation?” and “How do I determine the value of those goods or services?” The process for resolving these issues is somewhat circular. In order to decide if you need to disclose the value of items or services received in exchange for a payment to a charity, you must first decide if those goods or services have more than “insubstantial” value. That means you must first make a “good faith estimate” of the fair market value (FMV) of the item or service. First, we will look at some situations in which you can disregard certain goods or services, and later we’ll discuss how to assess FMV.
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 and amounts were first described in a 1990 IRS Revenue Procedure and are adjusted annually for inflation. For calendar year 2017, these “low cost articles” are those whose FMV is not more than two percent of the donor’s payment or $107.00, whichever is less; or when the payment is at least $53.50 and the only benefits received are token items such as mugs, calendars etc., bearing the organization’s name or logo. These token items are deemed to be “low cost articles” if their cost (as opposed to their fair market value) does not exceed $10.70, in the aggregate, for all items received by the donor during that year.
Membership Benefits – IRS regulations specifically permit non-profits to disregard two types of benefits customarily offered to donors in exchange for membership payments:
In the cases described above, the full amount of the payment is deductible as a gift by the donor and the organization does not have to disclose any fair market value for the item or services received.
If you keep in mind the guiding principles behind these rules, you can’t go too far astray. The policy of the Internal Revenue Service is that a sale is not a gift. That is, a contribution is only that part of a payment above the value of what the donor gets in return for his or her payment. If you, as a charity, misrepresent or undervalue the exchange, you’re participating in defrauding the Treasury and colluding to overstate a deduction. Obviously you don’t want to do that. Another point to keep in mind, other IRS regulations require you to disclose at the point of solicitation the fair market value of goods or services to be received during a fundraising campaign. Thus, when you send your acknowledgment/thank you letters to donors, this disclosure should not come as a surprise.
The first time through, this process can be confusing and difficult. But once you and your donors are familiar with the rules, it will be much easier. There are additional rules for disclosure of goods and services provided to the family or employees of a donor and, of course, regulations and examples to follow in those cases.
For additional information:
The content of this article is for general informational purposes and does not constitute legal advice or a legal opinion. For answers to specific questions concerning your situation, you should consult a knowledgeable attorney who can advise you regarding your particular circumstances.