What You Need to Know About Donor Disclosures
Protect Yourself and Your Donors With These Practices
Charitable nonprofits, 501(c)(3), must abide by many IRS rules in exchange for their considerable tax advantages.
The new tax laws that took effect in 2018 have not changed the obligations of nonprofits to make disclosures to donors.
Although the new tax laws make it considerably more difficult for donors to take a charitable tax deduction since the threshold has changed, nonprofits will be wise to provide all the proper disclosures to all donors anyway.
Although the donor has the responsibility of making sure that he or she has the proper paperwork to substantiate a donation, the IRS strongly suggests that charitable organizations help donors by providing appropriate acknowledgments in a timely fashion.
Here is a list of the most relevant rules governing this aspect of your fundraising.
Quid Pro Quo Contributions of More Than $75
"Quid Pro Quo" means an exchange. The donor, in the case of a nonprofit, gives something and gets something else in return. For instance, your donor might give you $250 and then receives a dinner at your annual gala. But the meal only costs $150. The rest of the $250 will be considered a donation.
It's important to advise the donor how much was a gift and how much was paid for the dinner. It's important that the donor knows how much he may be able to deduct from his income taxes, should he choose to itemize his deductions.
If your organization receives a contribution of more than $75 and then gives the donor goods or services in return (sometimes called a "gift premium"), you must provide the donor with a written disclosure statement that includes the following:
- A statement that the donor can deduct, for tax purposes, only the difference between the value of the donation and the value of any gift premium received.
- A good faith estimate of the fair market value of the gift premium given to the donor in exchange for the donation. You may use any reasonable method to determine the fair market value of the premium, as long as you do so in good faith.
Example: Your organization receives $150 from a donor, and you provide him with two tickets to a musical performance that are worth $50. Your disclosure statement would say:
"Thank you for your generous donation of $150. Please note that only the portion of your contribution that exceeds the value of any gifts you receive is tax-deductible. The estimated fair market value of your gift, two concert tickets, is $50 total."
You must provide the disclosure either when you solicit a donation from the donor or when the contributor makes the gift. You only have to do it once.
In some cases, the gift received might be of "insubstantial benefit" as defined by the IRS. Such a benefit is less than two percent of the donation or $106.00, whichever is less. For example, you might provide a coffee cup or tote bag branded with your logo for a gift of $500 or more. The value of the gift will be of "insubstantial benefit." Be sure to check the IRS website for up-to-date information about this as the figure can change in line with inflation.
Contributions of $250 or More
Donors who give your organization $250 or more may deduct a charitable contribution of that amount only if they have a written acknowledgment of their donation from your nonprofit. Charities are expected to provide a disclosure of these gifts.
Although the statement is not due until the donor has to file his/her tax return, you should provide the statement at the time of your "thank you" for the donation. And that acknowledgment should be sent promptly after receipt of the contribution. Acknowledgments may be on paper or electronic.
Your disclosure statement should contain at a minimum:
- a declaration of the amount of the donation (if cash)
- a description (but not value) of the property or goods donated
- a statement of whether your organization provided goods and services in return for the donation (a good-faith estimate of the value of the goods/services provided must be included if goods or services were indeed provided in return for the donation)
This information must be provided in writing at the time of the solicitation or when the payment is received and in a way that will come to the attention of the donor. Your best bet? A well thought out thank you letter.
Some purchases, such as at a gift shop, do not require disclosure if no gift or donation was intended.
What Happens If Your Charity Does Not Follow Disclosure Rules?
You may lose the confidence of your donors. They need your disclosures for tax reasons.
Also, written disclosures are mandated for Quid Pro Quo Contributions of More Than $75. Your charity could face a penalty of $10 per donation or up to $5000 per fundraising event or mailing.
Disclosures are relatively complex. Make sure your development staff and your accountant understand the rules completely.
For more information on disclosure and substantiation rules, read IRS Publication 1771, Charitable Contributions--Substantiation and Disclosure Requirements at the IRS website, or call 1-800-TAX-FORM.
This article is just for informational purposes. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant.