Note: An earlier version of this post originally appeared on my firm’s website, attorneykevinkelly.com. You can read the the post about $250 contributions here, and the post about $75 contributions here. I have updated and revised both posts for posting here. Enjoy!
If you run a 501(c)(3) organization, one of the important benefits your donors enjoy is the ability to deduct their contributions on their taxes. In certain cases, the IRS requires the organization receiving the donation to provide donors with written acknowledgements of the contribution. It’s not difficult, but it is critically important for your donors.
There are two situations that require written acknowledgement from charities:
- Any contribution of $250 or more, and
- A contribution of $75 or more when the donor receives goods or services in exchange.
Contributions of $250 or More
If a donor makes a single donation of at least $250 to your organization, the donor needs a contemporaneous written acknowledgement of the contribution. The acknowledgement must contain:
- The name of your organization;
- If any money was contributed, the amount of money donated;
- If there was a non-cash contribution, a description of the contribution (but you need not provide the value);
- If no goods or services were received by the donor, a statement saying that;
- If goods or services were received by the donor (more on that in a moment), a description and a good faith estimate of the value of the goods or services; and
- If only intangible religious benefits were received by the donor, a statement saying that.
What is “contemporaneous?” You don’t actually have to provide the acknowledgement immediately–it’s “contemporaneous” as long the donor receives it before the donor files his or her tax return or the due date (plus extensions) for filing the tax return. Because taxpayers may still be getting W-2s through the end of January, January 31 of the year following the year of the contribution is about as late as I’d want to wait.
As a practical matter, though, why wait that long? I think it’s probably best to issue written acknowledgements shortly after receiving the donation so you don’t forget later. If you do wait, you may wind up having a bunch to issue at once (that doesn’t sound fun) or you might miss the deadline, which will disqualify those donations from deduction (which makes for angry donors, which also doesn’t sound fun).
Above, I mentioned that if there were goods or services received by the donor, a description and good faith estimate of the value of those goods or services is required. There are a couple exceptions to that rule:
- Low-value items. I like to think of this as the “tote bag” or “coffee mug” exception. An item qualifies for this if:
- The fair market value of the benefit received no greater than 2% of the donation or $106 (the $106 part is adjusted each year for inflation–that’s the 2016 value), or
- These three things are true:
- The donation is at least $53 (again, that’s inflation-adjusted, and $53 is the value for 2016),
- The only items provided bear the organization’s name or logo, and
- The cost of the items is within the limit for “low-cost articles,” which is $10.60 for 2016 (and is also inflation-adjusted)
- Membership benefits. If members get some sort of benefit for an annual payment of $75 or less, it doesn’t count as substantial. For instance, free/discounted admissions, parking, or gift shop discounts for members would qualify under this exception.
One of the great things the IRS does in Publication 1771 is to give you clear examples of acknowledgements that follow the rules:
Cash contribution, nothing in return:
“Thank you for your cash contribution of $300 that (organization’s name) received on December 12, 2015. No goods or services were provided in exchange for your contribution.”
Cash contribution, something substantial in return:
“Thank you for your cash contribution of $350 that (organization’s name) received on May 6, 2015. In exchange for your contribution, we gave you a cookbook with an estimated fair market value of $60.”
“Thank you for your contribution of a used oak baby crib and matching dresser that (organization’s name) received on March 15, 2015. No goods or services were provided in exchange for your contribution.”
Contributions of $75 or more where the donor receives goods or services in return
From the point of view of a charitable organization, this documentation requirement is different than the “$250 disclosure” in a very important way: failure to provide written documentation when a donor contributes more than $75 and receives something in return results in a penalty to the charitable organization. The penalty is $10 per undocumented contribution with a cap of $5,000 per fundraising event or mailing.
The reason the IRS is so interested in whether or not a donor receives goods or services in return for a contribution because that affects how much of the contribution is deductible. If a donor receives something in return, the value of whatever he or she received is not deductible. For example, if a donor donates $200 to a charitable organization, and gets an item in return that is valued at $50, only $150 of that contribution is deductible.
The written statement has to have two additional key pieces of information:
- A statement informing the donor that, in the words of 26 U.S.C. 6115(a)(1), “the amount of the contribution that is deductible for Federal income tax purposes is limited to the excess of the amount of any money and the value of any property other than money contributed by the donor over the value of the goods or services provided by the organization,” and
- A good faith estimate of the goods and/or services received.
A “good faith estimate” is exactly what it sounds like: a fair estimate of what the goods or services provided were worth.
The disclosure must be made either during the solicitation or once the contribution is received, and the disclosure has to be made in writing that would be sufficient to get the donor’s attention.
There are also a couple of exceptions to this rule. A written disclosure is not required when:
- The “low-value item” (or as the IRS calls it, the “token” exception) or “membership benefits” exceptions that we discussed earlier apply,
- The only benefit consists of intangible religious benefits, or
- There’s no real donative intent involved–the classic example is a sale of an item at a gift shop, it’s not really a donation, it’s more like a retail sale.
Beyond the legal stuff: donor communication
These acknowledgments don’t have to be bland, “let’s meet those legal requirements” boring stuff. Donation acknowledgements are a great way to deepen your relationship with your donors and help them feel like they’re supporting a great cause–because they are, right?
I’m a blood donor (I know, I talk about this a lot, but stick with me here). Every time that I do a donation, the blood center sends me an e-mail, thanking me for my donation and telling me that my donation helped save lives, and they usually provide an example patient–usually a cute, smiling kid that needed blood. It’s not a legal requirement, but they want me to feel good about my donation and encourage me to keep coming back in the future. You have to communicate with the donor anyway, why not use it to meet the legal requirements and deepen your relationship with the donor?