Acknowledging Year-End Charitable Contributions

 

Both nonprofits and their donors should be aware of IRS rules surrounding the acknowledgment and substantiation of gifts to 501(c)(3) organizations, especially as donors prepare to seek deductions following the end of this calendar year. Below are key requirements depending on the type of donation your nonprofit receives.

Cash Contributions with No Goods or Services Provided in Return
An organization technically has no legal obligation to provide its donors with an acknowledgement for a straightforward cash donation; however, under the Internal Revenue Code, a donor cannot claim a deduction for cash contributions unless the donor has evidence a donation was made. For donations of less than $250, either an acknowledgement by the charity, a cancelled check, or a credit card receipt is sufficient evidence. For donations of $250 or more, the donor must be able to produce a contemporaneous written acknowledgment of the donation from the nonprofit itself. Effectively acknowledging contributions is therefore an important donor management practice to keep donors happy and engaged.

The nonprofit’s written acknowledgement must state:

• the name and address of the nonprofit;
• the date of the donation;
• the amount of cash and a description (but not the value) of any property other than cash contributed; and
• whether or not the organization provided any goods or services to the donor in consideration, in whole or in part, for the donation.

If no goods or services were provided in return, the acknowledgement letter should clearly and affirmatively state that fact. Donors will need to have these acknowledgement letters in hand when they file their 2022 tax returns. Your organization can either acknowledge each donation from a donor as it is made or provide a single year-end acknowledgement which lists all of the donations made by the donor throughout the year. If you fundraise through a third-party online platform, the platform may or may not automatically issue acknowledgment letters that satisfy the above requirements. Check with your platform to see if it effectively handles your gift acknowledgement obligations.

Contributions Where Goods or Services Are Exchanged in Return (“Quid Pro Quo” Transactions)
Donors may only deduct the amount by which their contribution exceeds the fair market value (FMV) of any goods, services, or benefits the donor received in return for their gift. For example, if an $80 gala ticket comes with a dinner with a FMV of $25, the donor may only deduct $55 for their contribution.

Nonprofits are legally required to provide a written disclosure to donors whenever their initial contribution is $75 or more and they receive goods or services in return. The disclosure must inform the donor that the deductible amount is limited to the value of the donation minus the FMV of received goods and services and must provide the donor with a good faith estimate of the FMV for those goods or services. This disclosure can be incorporated into your standard written acknowledgement letter, as described above.

A common exception to these requirements is when the goods or services exchanged are low-cost or “token” items of insubstantial value. An item qualifies if it meets one of two “insubstantial value” tests: either (1) its FMV is not more than two percent of the donor’s payment or $117, whichever is less; or (2) the donor’s payment is at least $58.50 and the only benefits received are token items such as mugs, calendars, pens, etc., bearing the organization’s name or logo, and the aggregate cost of all items received by the donor does not exceed $11.70 annually. These cost thresholds are adjusted annually for inflation.

Items that meet one of these tests do not trigger the disclosure requirement and can be disregarded by the donor when calculating the benefit-adjusted value of their deduction. A similar exception allows donors to disregard certain low-value membership benefits that may be provided in exchange for a contribution of $75 or less.

Donations of Property
Donors also require written documentation from nonprofits in order to claim a deduction for donated property. Nonprofits should acknowledge donations of property by describing the property received but should not provide their own dollar estimate of the property’s value. It is the donor’s responsibility to assign a dollar value to their gift at the time they claim a tax deduction, and nonprofits are not required to provide their own estimate. Therefore, a nonprofit’s written acknowledgement for property donations should generally include:

• the name and address of the organization;
• the name of the donor;
• the date and location of the contribution;
• a description of the non-cash contribution sufficient to identify it (e.g. “three used desktop computers with monitors”); and
• a statement of whether goods or services were exchanged in return for the gift, and a FMV estimate of those goods or services if applicable.

Nonprofits may face additional requirements for property donations valued over $5,000 and for donations of vehicles.

See our legal alert, “Tax-Exempt Organizations Alert: Requirements for Acknowledging Charitable Donations” for more information or the IRS’s publication on this topic, “Charitable Contributions: Substantiation and Disclosure Requirements.”