Adherence to Substantiation Guidelines Can Help Donors

By Joanne R. Handyside, Cherry, Bekaert & Holland, L.L.P. (CB&H)
Email: jhandyside@cbh.com

1040 tax season is now in full swing, but the deduction for charitable contributions comes with a significant change for 2007 returns. Donors can now no longer deduct any cash contribution, regardless of the amount, unless they have maintained a bank record, payroll deduction record or written communication from the donee organization.

While this change does not require charitable organizations to begin issuing receipts for each and every contribution received, organizations should ensure that they are, at a minimum, providing prompt and proper acknowledgment to donors in accordance with the contribution substantiation and disclosure guidelines set forth in IRS Publication 1771.

Written Acknowledgment
For single contributions of $250 or more, the recipient organization needs to provide the donor with a timely, written acknowledgment before the donor can claim the donation as a charitable contribution on their federal income tax return. For cash contributions, this written acknowledgment should contain the organization’s name, the amount of the cash contribution, and a statement declaring whether or not any goods or services were provided in exchange for the contribution.

If goods and services were provided to the donor, then the acknowledgment must describe what was provided in return for the contribution along with a good faith estimate of its value. Acknowledgments for non-cash contributions should follow similar guidelines, with the exception that instead of declaring the amount of the contribution, the acknowledgment should describe the donation without declaring a specific value.

It’s important to note that the IRS does not prescribe an official format for the acknowledgment. As such, the acknowledgment can be sent to the donor via standard mail as a thank you letter or postcard or via email.

Written acknowledgments are not needed to substantiate separate contributions of less than $250 even if the cumulative annual contribution totals $250 or more, such as a weekly church offering. In these instances, sending an annual summary at the end of the year can be sufficient for the donor’s tax records.

Goods and Services
As noted above, whenever an organization provides goods or services to a donor in exchange for a contribution of $250 or more, the acknowledgment must include a good faith estimate of the value of such goods or services. This value, in turn, reduces the amount of the contribution deductible for tax purposes. There are three notable exceptions to this rule – the token exception, the membership benefits exception and the intangible religious benefits exception.

Under the token exception, free, low-cost or insubstantial goods or services are exempt from inclusion in the acknowledgment. Per current IRS guidelines, goods and services fall under the token exception, “if the payment occurs in the context of a fund-raising campaign in which a charitable organization informs the donor of the amount of the contribution that is a deductible contribution, and:

1. The fair market value of the benefits received does not exceed the lesser of 2 percent of the payment or $89 for 2007 ($91 for 2008), or
2. The payment is at least $44.50 for 2007 ($45.50 for 2008), the only items provided bear the organization’s name or logo (e.g., calendars, mugs, or posters), and the cost of these items is within the limit for ‘low-cost articles,’ which is $8.90 for 2007 ($9.10 for 2008).

Under the membership benefits exception, goods and services provided as a right or benefit of membership (i.e., gift shop discounts and free or discounted admission or parking) are exempt from the substantiation rules when given to a donee in return for an annual membership fee of $75 or less.

And finally, religious organizations that provide what are referred to as “intangible religious benefits” to donors can simply describe as such those intangible benefits defined by the IRS as normally “not sold in commercial transactions outside a donative (gift) context.” Donations of non-cash items such as real estate, vehicles, boats and airplanes, require additional substantiation requirements.

Out-of-Pocket Expenses
Charitable organizations should also provide a written acknowledgment to any donor who essentially makes a contribution in the form of unreimbursed out-of-pocket expenses (e.g., travel expenses) equal to $250 or more. Similar to the written acknowledgment required for cash contributions, this statement should include a description of the donor’s services and a statement declaring whether or not any goods or services were provided in exchange for the contribution.

As before, if goods and services were provided to the donor, then the acknowledgment must describe what was provided in return for the contribution along with a good faith estimate of its value, adhering to the same exceptions noted above.
Disclosure Requirement
When a donor receives goods or services in return for a single payment in excess of $75, then the donee organization is required to provide a written disclosure. This disclosure is necessary because tax laws limit the amount of the donor’s contribution deduction to only the amount of the contribution that exceeds the fair market value of the goods or services received.
The written disclosure statement must provide the donor with a good-faith estimate of the fair market value of the goods or services received, and notify the donor that the deductible amount of the contribution is limited for federal income tax purposes to the remainder of the contribution amount minus the stated fair market value of the goods or services received.

This required disclosure statement must be sent to the donor in writing and in a clear manner (i.e., not buried in the small print at the bottom of a fund-raising request). Charities that fail to meet this written disclosure requirement are subject to a $10 penalty per contribution, not to exceed $5,000 per fund-raising campaign.

Conclusion
Taxpayers will no doubt spend a bit more time on their 1040s this year as they work to gain a better understanding of the new recordkeeping requirements for tax deductible cash contributions. But by observing the IRS guidelines for proper acknowledgment and complying with disclosure requirements, charitable organizations can take the first step in providing the timely and accurate information their donors need.

Joanne is a Partner with CB&H and a member of the Firm’s Not-For-Profit Industry Group.