Contributions matter: A Primer on best practices (Part 1)
Contribution revenue is the lifeblood of most not-for-profits (NFPs). While NFPs actively solicit donations, many are unaware of the regulatory requirements associated with these activities. This multi-part series will cover the following important topics:
Providing donors with gift acknowledgement letters that comply with substantiation requirements for charitable contributions
Tax Court cases regarding insufficient written acknowledgements and recommended best practices
Complying with laws and regulations for fundraising and soliciting donor contributions
Establishing donor privacy and gift acceptance policies
Gift acknowledgment letters
Contribution substantiation requirements – for taxpayers to claim a tax deduction – are enumerated in Internal Revenue Code section 170 and related regulations. In most instances, merely stating the organization’s gratitude to donors is insufficient for tax compliance purposes. The variables are the dollar amount of the gift, whether goods or services were provided in return, and whether the gift was cash or non-cash (for example, securities or real estate).
Noncompliance can result in disallowance of a contributing taxpayer’s charitable tax deduction upon audit, as well as fines and penalties. Although the onus for substantiation is on the donor, NFPs can facilitate the process and, at the same time, avoid adverse consequences by providing a timely written acknowledgement to taxpayers.
The acknowledgement should include the following information:
The name of the donor
The date or dates the contribution was received
A description of the contribution
The amount of a cash contribution but generally not the value of a noncash donation
A description and a good faith estimate of the value of any goods or services provided by the organization in return for the contribution, or a statement that nothing of value was provided
The NFP’s legal name and confirmation of the NFP’s 501(c)(3) tax-exempt status
The NFP Section provides several customizable gift acknowledgement templates that NFPs can use. IRS Publication 1771, Charitable Contributions—Substantiation and Disclosure Requirements, also provides examples of acknowledgements.
Receipt of any goods or services, including cash or equivalents such as gift cards, merchandise or other tangible property, services, benefits or privileges, in exchange for the contribution adds a level of complexity, depending on the value of the consideration. However, Publication 1771 describes three important exceptions that enable NFPs to exclude a description in the acknowledgement:
Token exception: In the context of a fundraising campaign, “insubstantial” goods or services are provided by the organization in exchange for contributions
Membership benefits exception: Annual membership benefits are provided in exchange for an annual payment of $75 or less and consist of annual recurring rights or privileges.
Intangible religious benefits exception: A religious organization provides only “intangible religious benefits” to a contributor.
Donors are required to obtain “qualified appraisals” for non-cash contributions over $5,000, except for publicly traded securities. If an NFP receives donated appreciated marketable securities, the NFP or its broker, investment adviser, or the custodian of the investment account must value the securities in accordance with IRS regulations. For more information, see IRS Publication 561, Determining the Value of Donated Property.
An NFP is required to complete IRS Form 8282, Donee Information Return, and submit a copy to the IRS and the donor, if the organization receives charitable deduction property and within three years sells, exchanges, or disposes of the property—unless the property is valued at $500 or less or is distributed for charitable purposes. The purpose of Form 8282 is to report information to the IRS and donors about dispositions of certain charitable deduction property made within three years of the date of the contribution.
Read more about substantiation requirements related to noncash contributions and deduction and substantiation rules for charity auctions on the IRS website.
In the next part of this series, we will look at best practices for sufficient charitable deduction documentation.
Author: Robert H. Yunich, CPA, is based in New York City. Over the past 30 years, he has had extensive involvement with a variety of not-for-profits as a volunteer, donor, and board member.