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Making Sure Donors Get Every Deduction Possible

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The importance of following year-end giving and receipting rules for charitable organizations

By Daryl Reese, A Non Profit Attorney in Santa Rosa

With the end of the year right around the corner, this is an important time to review, and perhaps revise, your year-end giving and receipting policies and procedures. The IRS imposes very specific rules regarding charitable gift receipts, and violating them can result in causing donors to lose their tax deduction. Often times, charitable organizations, churches, and other exempt organizations are simply unaware of the rules.

When is a written acknowledgement required?

In order for a donor to take a tax deduction for their gift to a qualified charitable organization, they must have either a bank record or written communication from the charity for any monetary contribution made. However, if any single gift is more than $250, the donor must receive a written acknowledgement from the charity. If the donor received goods or services in exchange for their gift, such as attendance at a fundraising banquet, the charity is required to provide a written disclosure to the donor for a single payment in excess of $75.

To avoid maneuvering through all of the nuances the rules impose, it is simply good practice to provide every donor with a written acknowledgement for any gift, whether given in response to each gift, or at year end.

Gift acknowledgements must be provided on or before the day a donor’s tax return is due or the date their tax return is filed, whichever is sooner. So while an organization might think it has until April 15 of the following year to provide a receipt, that might be too late. And if the donor does not have the receipt prior to filing, they are unable to take the deduction, even if they receive it later.

What does the receipt need to include?

Gift acknowledgements should include the organization’s name as it is listed with the IRS, the donor’s name, the amount contributed, the date of the donation, and the date of the receipt. In addition, the receipt should include a statement that states whether goods or services were provided to the donor in exchange for the gift. If so, the fair market value of what was received needs to be provided along with the resulting charitable portion.

Substantiating non-cash gifts

Non-cash gifts come in a variety of forms and have special rules. If a donor provides personal property, such as household items, they must obtain a proper acknowledgement for deductions of $250 or more. It is important to note, however, that a charity should only substantiate what was given, and not place any monetary value on the items. For example, if a donor gives your organization a 4-drawer metal filing cabinet, you should describe the gift in the receipt with sufficient detail, and leave the donor to obtain the fair market value in taking the tax deduction.
There are additional rules for noncash gifts in excess of $500 and $5,000 as well as for the donation of vehicles. Out-of-pocket costs incurred by volunteers performing services are also tax deductible and informing your donors that they might be able to deduct some of their expenses can go a long way in enhancing volunteer and donor relations.

What about gifts given on December 31?

There are some important rules governing when a donor needs to deliver their gift for it to be deductible in the prior tax year, and following those rules is critical. The IRS measures the timing of the gift given based upon “unconditional delivery.” That essentially means that the donor has given up complete control of the gift. For gifts given by check, the date of the gift is the date it is mailed. However, if someone writes a postdated check, that amounts only to a promise to pay at a later date and then the gift date becomes the date on the check. Also, if a donor’s gift bounces for insufficient funds, it is not deemed to be delivered until the funds are fully received.

Credit card gifts are typically considered delivered when they are processed, which is often immediately. But beware, if a donor sends in a response card with a credit card number on it, the gift is not considered delivered until it is received. Also, if a credit card gift is denied or otherwise not processed, the gift is not considered given until the issue is corrected, Other forms of electronic giving, such as giving by text or Internet giving is considered delivered when made, again, subject to the same rules as credit cards.

Know the IRS Rules!

There are many rules surrounding the proper acknowledgement of donations, and charitable organizations should be careful to know them and put them into practice. The IRS has two publications that spell out the rules with even more detail. Publication 526 is useful for preparing tax returns and helps exempt organizations understand the underlying rules, including information on contributions that are not deductible, limits on deductions, and which records to keep. Publication 1771 discusses exempt organization’s substantiation and disclosure requirements.

As an exempt organization, it is incumbent upon you to ensure that your donors can take full advantage of the rules for charitable deductions. Doing so is good business practice and will provide donors with the assurance they need to continue to contribute to your mission.

Daryl Reese is a California attorney practicing nonprofit law, general business law, and civil litigation. He spent more than 20 years as a nonprofit executive and has a passion to equip charitable and faith-based organizations increase their mission by knowing and applying nonprofit laws.