Substantiation rules have become more defined and burdensome for organizations. Gone are the days of claiming a deduction for cash dropped into the collections plate or donation box. Without a record or acknowledgment, cash donations are no longer deductible by the donor. If a charitable deduction is important, organizations must provide a written receipt to the donor. In this article, we will discuss how to substantiate and report charitable contributions.
There are many considerations of what donors need for substantiation depending on the type of donation made. Organizations need to be aware of the substantiation requirements not only to avoid IRS penalties but to assist donors in maximizing their charitable deduction so they receive the tax benefits they deserve. A few of the most common types of donations and documentation required are:
- Quid Pro Quo disclosure $75.00 or more
- Unreimbursed expenses
- Cash donations
- Non-cash donations
- Payments for attending events or purchasing auction items
- Contributions greater than $250
- The statement “no goods or services provided in exchange for your contribution”
- Form 8282 – subsequent dispositions of donations
- Vehicle donations Form 1098-C
- Qualified appraisals for property donations greater than $5,000
- Raffle prizes – Form 945, Form 5754
- Contributions qualifying for credits such as the Montana Qualified Endowment Credit
We will review the substantiation rules for the following:
- Contributions of $250 or more;
- Quid Pro Quo Contributions; and
- Contribution of a property with a value of $5,000 or more.
Contributions of $250 or More
For a charitable contribution of $250 or more, the donor must obtain a receipt substantiating the contribution to obtain a deduction. Substantiation consists of a written acknowledgment of the donation and the acknowledgment must state the date and the amount of donation. If the donation consists of non-cash items or property, include a description of the property and the date received. The organization is not required to estimate the value of the item. Organizations have the flexibility to customize the acknowledgment as there is no required format, as long as the information is sufficient to identify the donation.
At a minimum, the acknowledgment should contain:
- The organization’s full legal name and address
- The name of the donor
- Date of the donation
- Amount of cash donated
- A description of any donated property
- A statement stating whether any goods or services were provided to the donor
- A description and good-faith estimate of the value of any goods or services provided in return for the contribution.
The acknowledgment can be a postcard, letter, email, or computer-generated form. Multiple donations can be referenced in a single receipt. It is not necessary to obtain or include the donor’s tax identification number.
For a donor to claim a deduction, the IRS requires that the donor receive the acknowledgment prior to filing the tax return for the year in which the contribution is made. Best practices would be for the organization to provide the acknowledgment by year-end or shortly thereafter.
Each contribution is viewed separately, even if made as part of a series of payments, such as monthly or weekly pledge payments unless all the contributions are made on the same day. The organization is not required to aggregate contributions in determining if a donor’s contributions trigger the substantiation requirement.
When contributions are received through a community giving program, such as the United Way, the organization receiving the donation from the community program has no obligation with respect to the substantiation requirement for the individual donors. The organization that receives the initial donation has the responsibility of complying with the substantiation requirements.
Quid Pro Quo Contributions
Organizations holding fundraising events often provide donors with something of value or a benefit in return for their donation. This is referred to as a “quid pro quo” contribution defined by the IRS as ‘a payment to a charity by a donor partly as a contribution and partly for goods or services provided to the donor by the charity’. If a payment of $75 or more is made and the donor receives something of value in return, the IRS requires the organization to provide a disclosure statement to the donor limiting the amount of the contribution.
For example, if a donor gives a charity $100 and receives a ticket to a sporting event valued at $35, the donor has made a quid pro quo contribution. Even though the charitable contribution portion of the payment is only $65, a disclosure statement must be filed because the donor’s payment of $100 exceeds $75. The statement should state that only the portion of the excess of the contribution over the value of the goods and services provided is deductible as a charitable contribution. Determining the value will most often involve a good-faith estimate of the value.
The disclosure statement must inform the donor that the deductible amount of the contribution is limited to the amount of the contribution over the value of the goods or services received. Under the Quid Pro Quo rules, the organization must provide a good faith estimate of the value of the goods or services. In addition, the disclosure statement should include the organization’s name and address, the name of the donor and the date of the donation. It is not necessary to include the donor’s tax identification number.
The disclosure statement must be given to the donor at the time of the solicitation or the receipt of the contribution. In the case of a charity auction, this requirement could be satisfied by listing the fair market value of each item in the auction catalog. It is not necessary to aggregate separate payments to reach the $75 threshold unless the payments are all part of the same transaction. Failure to make a required disclosure statement could result in the imposition of IRS penalties on the charity organization.
Certain quid pro quo contributions are not subject to the disclosure requirements. There are three exceptions to disclosure rules:
- For intangible religious benefits (such as the right to attend religious services in return for a contribution);
- When the item has only a token or de minimis value, such as a calendar or bookmark, the value can be excluded. The IRS adjusts this amount annually and provides for safe harbor limitations.
- When there is no donation or gift element involved such as when an organization provides membership privileges for a contribution of $75 or less. Examples include free admission to events, free parking, and discounts on member purchases.
Contributions of Property Valued at $5,000 or More
For contributions over $5,000, a qualified appraisal must be obtained for the donor to claim the deduction. The burden of obtaining the appraisal is the responsibility of the donor. An appraisal must satisfy the IRS requirements to be “qualified” and cannot be dated earlier than 60 days before the date of the contribution and no later than the date of the contribution.
An organization receiving a contribution of a property with a value of more than $5,000 may be subject to certain IRS reporting requirements. These requirements apply regardless of whether the donor is an individual or a corporation. The reporting requirements apply if (1) the organization received a contribution of property (other than cash or publicly-traded stock) for which the donor took a deduction of more than $5,000 and (2) the organization sells the property within two years of its receipt. The IRS requires that the subsequent sale be reported on Form 8282. This information will be used by the IRS as a basis for determining whether the amount of the donor’s deduction was overstated.
Form 8282 is filed with the IRS and includes the following information:
- The name, address, and taxpayer identification number of the donor,
- The donee organization’s name, address, and identification number,
- A description of the property,
- The date of the contribution,
- The date of disposition of the property, and
- The amount received for it.
Because of this reporting requirement, anytime an organization receives a contribution of property (other than cash or publicly-traded stock) with a value of more than $5,000, it should obtain the donor’s name, address, and taxpayer identification number. The organization will need this information if it is later required to report the sale of the property to the IRS.
Donors are generally allowed to deduct the entire amount of their contributions to qualified public charities. The deduction is contingent upon the donor’s compliance with a number of substantiation requirements, most of which call for the cooperation of the charitable organization. Because donors rely on the documentation to substantiate the deduction claimed on their income tax returns, it’s important for public charities to comply with the substantiation rules.
The substantiation rules are complex and contain many provisions beyond what we’ve discussed here. Please contact your Anderson ZurMuehlen consultant if you have specific questions or need additional guidance.