Now that tax season is upon us, most individual filers are scrambling to maximize their itemized deductions. One thing that many filers look to for those extra deductions is charitable contributions. The IRS requires thank-you letters from nonprofit organizations to substantiate the claims of these deductions in excess of $250. But what should be in a thank-you letter? What required language needs to be in the letter? What part of the gift is considered a donation? What amount is required to be received before the organization needs to issue a thank-you letter?
The IRS issued Publication 1771 (http://www.irs.gov/pub/irs-pdf/p1771.pdf) as a guide to nonprofit organizations to help address these issues. It states that when a donor contributes more than $250, they are responsible for obtaining written acknowledgement from the organization to which they made the contribution in order to claim the contribution as a deduction on their tax return. The organization incurs no penalty for not issuing a written acknowledgement; however, the taxpayer cannot claim a tax deduction. The organization can either issue a separate acknowledgement for each single contribution of $250 or more, or one acknowledgement, such as an annual summary, for each donor. However, donors expect to receive a “thank you” for their contribution, no matter the amount.
The written acknowledgement must include the following:
- Name of the organization
- Amount of cash contribution
- Description of non-cash contribution received (but not the value as this is the responsibility of the donor to provide)
- A statement that no goods or services were provided by the organization in return for the contribution, if that was the case
- Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
- Statement that foods or service, if any, that an organization provided in return for the contribution considered entirely of intangible religious benefits, if that was that case.
Sometimes goods and/or services are provided in exchange for a donation, called a quid pro quo contribution. For example, if a donor buys a ticket to a fundraising event where they receive a meal, the portion of the ticket that equates to the fair value (not the cost) of the meal is not considered a contribution. A written acknowledgement would need to detail the portion that is deductible to the tax payer in that event.
However, there are certain exceptions to the rule that the value goods or services received in exchange for contributions are not deductible. The first is the exception for “token” gifts, which is where any goods and/or services provided are insubstantial – for example, receiving a coffee mug which costs the organization $10.20 or less in exchange for a donation of $51.00 or more would be a considered a fully deductible contribution. The IRS adjusts these limits for inflation. More examples of a token gift can be found in IRS Revenue Procedure 90-12, and 92-49 (http://www.irs.gov/pub/irs-tege/rp_1990-12.pdf) (http://www.irs.gov/pub/irs-tege/rp92_49.pdf)
The second exception is for “member benefits”. This is where an annual payment of $75 or less is given for recurring rights or privileges such as: Free or discounted admissions to an organization’s facilities, members’ only events sponsored by the organization or events, parking, or discounts to the organization’s gift shop.
The final exception is for “intangible religious benefits”. When a religious organization provides intangible religious benefits to a contributor, the written acknowledgement does not need to address those benefits. These benefits are provided to the donor during religious ceremony. An example of an intangible religious benefit would be wine used in a religious ceremony.