By Sarah Avery, Director, Friedman LLP
Donor acknowledgements raise frequent questions by not-for-profit organizations. Donor acknowledgments are part of a comprehensive system of internal controls for recording contributions that include complying with the Internal Revenue Service (IRS) substantiation and disclosure requirements.
What are donor acknowledgements exactly and how can your not-for-profit ensure it’s complying with best practices? Here are the top nine things your organization should know so you can incorporate them into your financial practices in 2016 and beyond.
1. Minimum substantiation and disclosure requirements needed
To meet IRS substantiation requirements, acknowledgements or thank you letters are required to include the following, at a minimum:
- The date of the donation;
- The name of the donor;
- The name of the organization;
- The amount of cash; and
- A statement about whether the organization provided any goods or services in return for the contribution.
2. Contributions less than $250
A written acknowledgment from the charitable organization is not required for contributions less than $250. Donors can substantiate individual contributions that are less than $250 with a cancelled check or other bank record.
3. Cash contributions less than $250
Any amount of cash is not deductible without a written acknowledgement.
4. Written acknowledgement required for contributions of $250 or more
For contributions of $250 or more, the donor’s cancelled check is not sufficient and a contemporaneous written acknowledgment (CWA) must be obtained. The acknowledgment requirement does not apply to cumulative individual amounts of less than $250. To qualify as contemporaneous, the CWA must be obtained before the donor files their income tax return. Therefore, for individual amounts of $250 or more, charities have the option of aggregating multiple donations in one written acknowledgement to donors and still meet the contemporaneous requirement.
5. Organization provides goods and services in return for the contribution
Typically, the deductible portion of donations in excess of $75 for which a donor received goods and services in return is limited and should be reduced by the value of any goods or services provided.
Examples of goods and services includes: premiums, food and beverages served at fundraising events and auction items.
Organizations must provide donors with the estimated fair market value of the goods or services received by the donor in return for the contribution.
An organization may use any reasonable method to estimate the fair market value of goods or services provided to a donor provided the method is applied in good faith. If the goods or services are not commercially available, the organization may estimate the fair value by using the fair value of similar or comparable goods or services even if they do not have the unique qualities of the goods or services being valued.
For experiences offered, such as a celebrity chef preparing dinner for 12 guests in your home, which are not commercially available, a good faith estimate of the value would be based upon a similar dinner available at a restaurant. The organization’s records should retain support for the basis of the estimate to comply with 990 reporting requirements.
The disclosure statement should explain that the amount of the deductible contribution for tax purposes is the excess of the amount contributed over and above the value of the goods or services provided and include the organization’s good faith estimate of the value of the goods or services provided to the donor.
6. Insubstantial benefits
Disclosure statements are not required when the goods or services provided are insubstantial benefits. As mentioned above, the deductible portion of a donor’s contribution must be reduced by the value of anything received in exchange. However, an insubstantial benefit can be ignored. The IRS provides guidelines for determining if benefits are insubstantial:
- The fair market value of all benefits received is not more than the lesser of $106 for 2016 or 2% of the contribution;
- The contribution is at least $53.00 for 2016 and the cost of the benefits received is no more than the low cost article value of $10.60 for 2016.
Organizations frequently distribute premium items, such as tote bags, mugs, books, videotapes, etc. to acknowledge donor contributions. If the premiums meet the low cost article value of $10.60 for 2016 and bear the charity’s name or logo, no disclosure of goods or services in the acknowledgement is required.
7. Quid pro quo
The gross proceeds from fundraising events include both contributions and exchange transactions. The contribution portion is the excess of the ticket price over the value of goods or services provided. Donations over $75 for which the donor receives goods or services is defined as a “quid pro quo,” and charities are required to provide donors with the estimated fair market value of the goods or services received by the donor in exchange for the contribution. The charitable contribution is only deductible by the donor to the extent it exceeds the value of the goods or services.
8. Declined value
If the donor rejects the goods or services, the value of the goods or services can be ignored, and the full amount of the contribution can be acknowledged as deductible. The charity can offer the donor the option of refusing the benefits at the time the contribution is made.
9. Noncash contributions
Written acknowledgments must be obtained by donors for non-cash contributions of $250 and over. The acknowledgment should include:
- The organization’s name;
- The date and place of the contribution;
- A reasonably detailed description (but not the value) of the item.
For noncash contributions of more than $5,000, the organization must complete the applicable sections of Form 8283.
Contact your advisor if you have questions about customizing acknowledgments for unique donations or less common types of contributions.
Sarah Avery is a Director at Friedman LLP, specializing in tax-exempt issues as they apply to nonprofit organizations. She can be reached at 973-929-3506 or savery@friedmanllp.com.