Charitable nonprofits, which are designated as 501(c)(3)s by the IRS, must abide by said agency's rules in exchange for their considerable tax advantages. Among those rules are regulations regarding how to verify donations to donors and the disclosures they must provide.
Although the Tax Cuts and Jobs Act (TCJA) passed in 2017 likely resulted in many fewer donors using the charitable tax deduction, the obligations of nonprofits to properly substantiate donations and provide certain disclosures to donors have not changed.
The TCJA raised the threshold for the standard deduction, so most donors will use that instead of itemizing their deductions.
Although the donor is responsible for ensuring that they have the proper paperwork to substantiate a donation, the IRS strongly suggests that charitable organizations help donors by providing appropriate acknowledgments in a timely fashion.
Whether donors ultimately receive a tax deduction for their donation or not, it's important for nonprofits to provide the proper disclosures and treat them all equally.
Here are the most relevant rules governing this aspect of your fundraising.
Quid Pro Quo Contributions of More Than $75
"Quid pro quo" means an exchange of goods and services. 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 designated as a donation and how much was payment for the item received. Donors need to know how much they may deduct from their income taxes should they choose to itemize deductions.
If your organization receives a contribution of more than $75, for example, 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.
Disclosure Statement Example
Your organization receives $150 from a donor, and you provide them with two tickets to a musical performance 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 donor or when the contributor makes the gift.
In some cases, the gift received might be of "insubstantial benefit" as defined by the IRS. Such "token" benefit must meet several thresholds such as:
- The benefit's fair market value is less than 2% of the donation or $106.00, whichever is less, or the payment is at least $53.
- The items provided (such as a calendar, mug, or poster) must bear the organization’s name or logo.
- And the cost of these items is within the limit for “low-cost articles,” which is $10.60.
For example, you might provide a coffee cup or calendar branded with your logo for a gift of $100 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. Acknowledgments may be on paper or electronic.
Your disclosure statement must contain:
- The donor's name
- The name of the organization and its address
- A confirmation that the organization is a registered 501(c)(3) organization and its federal tax identification number
- The date of the contribution
- The amount of cash contribution
- A detailed description (but not the value) of a non-cash contribution
- A statement that the organization provided no goods or services in return for the contribution if that was the case
- For religious organizations, a statement that “intangible religious benefits” were provided but have no monetary value for tax purposes must be included
- A description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
- The signature of an authorized person or representative of the charity
Written acknowledgments must be timely, reaching donors by the time they file their tax returns for the year in which the donation was made. A best practice is for charities to send acknowledgments immediately after the donation is made or no later than January 31 of the year following the donation.
What Happens If You Don't Follow Substantiation and Disclosure Rules?
If you fail to follow substantiation and disclosure rules, you may lose the confidence of your donors. They need verification of their donations and disclosures for tax purposes. Receipts or acknowledgment letters should be precise and include all necessary information.
If a donor is denied a tax deduction because the charity did not provide adequate verification, that donor will likely not return to support the charity and may tell others about the mistakes.
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 $5,000 per fundraising event or mailing.
Substantiation of donations and disclosures are relatively complex. Make sure your development staff and your accountant understand the rules completely.
Frequently Asked Questions (FAQs)
How can donors substantiate their donations to the IRS when they file their taxes?
For donations of less than $250, you can use a canceled check, a credit card receipt, your bank record, or an acknowledgment from the charity that states the date and amount of the contribution. When donating through payroll deduction, keep your pay stub showing any contributions you made.
For donations of $250 or more, you must have a written acknowledgment from the charity. The statement can be for each donation of that amount or a summary that the charity provides at the end of the year. The statement should include the amount and date of your donation and the words, "no goods or services received." As soon as you receive each written acknowledgment, please put it in a safe place until you file your taxes. You do not have to include the letter with your tax form but must produce it if audited.
For good measure, also keep the canceled check, your credit card receipt, or a bank statement showing dates and amounts.
Check out IRS Publication 561, Determining the Value of Donated Property, for more details.
Can volunteers take a tax deduction for their volunteer work?
People who volunteer for a qualified (501c3) charity may be able to deduct certain expenses. Expenses must be unreimbursed, directly connected with the service provided, incurred only because of the volunteer service, and not be personal, living, or family expenses.
Such expenses can be travel expenses such as commuting by public transportation or gas and upkeep for an automobile. Some volunteers may also deduct the cost of necessary out-of-town travel, such as meals and hotels.
You cannot deduct the cost of one's time or the market value of any services provided.
Volunteers should keep good records of mileage and expenses. They may need to get a letter from the charity about their volunteer role and verification of long-distance travel and its necessity. An acknowledgment from the charity may be required for travel expenses exceeding $250.