Donation Acknowledgment Letters – What information do we need to include for tax purposes?

Dec 28, 2012 by

cullinane law thank youWhat is a donor acknowledgment letter?

A donor acknowledgment letter is more than just a “thank you” letter. Nonprofits have certain requirements to follow — including providing donors with a donation “receipt” — often called an acknowledgment letter.

Donors giving more than $250 in a single contribution to a nonprofit organization need a written acknowledgment from a nonprofit to claim that deduction on their individual income tax return.

In what form does this written acknowledgment need to be?

  • Proper written acknowledgments can include many forms — letters, e-mails, or postcards.
  • For most gifts, there is no official IRS form that the nonprofit organization has to complete.

When does the nonprofit need to provide the written acknowledgment?

The IRS sets out that acknowledgments must be provided “in writing, at the time of solicitation or when the payment is received, and in a way that will come to the attention of the donor,” according to IRS Publication 1771.

For the written acknowledgment to be considered “contemporaneous” with the contribution, “a donor must receive the acknowledgment by the earlier of: the date on which the donor actually files his or her individual income tax return for the year of the contribution; or the due date (including extensions) of the return.” IRS Publication 1771.

Generally, most nonprofits provide written acknowledgment by January 31 of the year following the receipt of the contribution.

We advise that nonprofits provide written acknowledgment to donors in a timely manner — as close to the receipt of the gift as possible. We believe that expressions of thanks are like pancakes – they need to be served right away!

What needs to be included in this written acknowledgment?

Again, the IRS requires that a tax-exempt organization send a formal acknowledgment letter for any donation that is more than $250. The donor may use this letter as proof of his or her donation to claim a tax deduction.
The acknowledgment to the donor should include the following:
      • Name of the tax-exempt nonprofit organization.
      • Tax-exempt status: Statement that the organization is a 501c3 tax-exempt organization, if appropriate.
      • Date: The date the donation was received.
      • Contribution Details
          • For cash (checks, credit card, payroll deduction): The amount of the contribution that was received.
          • For non-cash gifts: A description (but not the value) of the non-cash contribution.
      • Statements – Good Faith Estimates of Value of Goods or Services. Ask: Did the donor receive any goods or services in exchange for the gift?
          • Include a statement that no goods or services were provided by the organization in exchange for the contribution, if that was the case.
          • If any goods or services were provided by the organization in exchange for the contribution, include a description and good faith estimate of the value of those goods or services. (Example: A fundraising dinner event where some of the funds received from the donor pays for the actual dinner, while the rest is a donation. Note the value of the dinner… see below.)
          • If the goods or services that were provided to the donor were insubstantial token amounts, note that, too. (Example: When a small gift is given to the donor with the nonprofit organization’s name or logo on it like a bumper sticker, coffee mug. See below.) Or, provide a statement that goods or services (if any) that the nonprofit provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case .

Some Examples

Cash donation:

“Thank you for your contribution of (insert amount of cash donation) on Date. No goods or services were provided in exchange for this contribution. Name of NP is an exempt organization as described in Section 501(c)(3) of the Internal Revenue Code; EIN ##.” 

You can make this a fun, too! I also like seeing something tied to the nonprofit organization in the required language:

Thank you for your contribution of (insert amount of cash donation) on Date. .  . No benefit was bestowed upon this donor in exchange for this contribution...other than the joy of giving to an organization that supports programs for Texas children with special needs. We are an exempt organization as described in Section 501(c)(3) of the Internal Revenue Code; EIN ##.”

For a non-cash item:

“Thank you for your contribution of one used table and set of six oak chairs that NP received on Date. No goods or services were provided in exchange for your contribution.”

Why does this matter?

The IRS has denied tax deductions to donors who did not have the proper acknowledgment from nonprofits. Two recent Tax Court cases outline the importance of nonprofits following the letter of the law. (Read: Chronicle of Philanthropy’s article: “IRS Crackdown Puts Focus on Gift Records“). Help make this easy for your donors.

Key Question: Is the Donor Receiving Something in Return for His or Her Donation?

When a tax-exempt entity provides a good or service in exchange for a donation of more than $75, the nonprofit has to

  1. provide the donor with written notice of the fair market value of those goods or services received and
  2. tell the donor that only a portion of the donation that exceeds the fair market value is tax-deductible.

The nonprofit organization will make a good faith estimate of the fair market value of the item or service and inform the donor. Generally, the nonprofit’s good faith estimate of the value of goods and services will be treated as the fair market value, and the donor can rely on that estimate (unless the donor knows that estimate is unreasonable).

Goods or services may include gifts, property, services, benefits or privileges. Some examples:

      • Special Fundraising Events like Dinners/Galas/Dances: The fair market value is what the donor received. The fair market value may be different from the actual cost to your organization. Even if all items to the event are donated (dinner, beverages, venue, decor, printing, entertainment, etc.), the fair market value is not $0. The fair market value is what it would cost for someone to purchase tickets to a similar event.
          • Example of language to include. Here is an example if you base the fair market value of meal/beverage cost: “Thank you for your support of the NP event. For your records, we received your check of $$ on Date. The fair market value of goods or services provided was $$ a person.
      • Auctions – Silent or Live: If there is a bid sheet or catalog produced for the auction that includes the fair market value, then the purchaser can rely on that stated fair market value of the item. If there is no estimate of the value of the item, then the fair market value is considered to be what was paid for the item and none of the payment is considered a gift (this is more like a sale of an item).
          • Example. Person wins a year’s membership at a fitness club where the annual membership costs $1,000 a year. If the winning bidder paid $1,200, the donor/bidder can deduct $200 as a charitable contribution. However, if the winning bidder paid $1,000 for the item (below market value), the winning bidder cannot deduct anything.
          • Example of language to include for auction bid sheet. Include on your bid sheet language like:  “Name of Nonprofit is a 501c3 tax-exempt organization. As such, contributions to the NP may be tax-deductible for federal income tax purposes. Keep a copy of your auction receipt for your tax records. The price paid for the purchase of an item at the auction may constitute a charitable contribution if the purchase price is greater than the fair market value of the item, property, or service provided. Contact your financial advisor for specific tax issues relating to the transaction.”
      • Items That are Not Commercially Available. To assess the fair market value, nonprofits can make a good faith estimate based on comparable items.
      • Raffles: Raffle tickets are not deductible as contributions. The buyer has purchased a chance to win something; the fair market value is the cost paid for that ticket.

However, the nonprofit organization can disregard some goods and services provided to donor, including:

      • Exception — Low Cost Articles – Token Gifts (IRS 1990 Revenue Procedure). In some situations, the nonprofit can disregard certain low cost articles (“token gifts”). The donor does not need to deduct the value of these token gifts. The benefit is considered a token if
          • the payment occurs during a fundraising campaign in which the nonprofit informs donors what amount constitutes a deductible contribution, and
          • the fair market value of the benefits is not more than 2% of the donor’s payment or $102.00 — whichever is less. OR
          • the payment is $51 or more and the only benefits received are token items with the nonprofit organization’s name or logo (like a mug, bumper sticker, t-shirt). 
      • Exception — Membership Benefits. IRS regulations allow tax-exempt entities to disregard two types of benefits often offered to donors related to membership payments:
          • When a membership costs $75 or less, the nonprofit does not need to disclose the value of free admission to members-only events, if the cost per person is within the “low cost articles” described above
          • Membership newsletter or program guide, if the publication is not a commercial-quality publication, does not have measurable fair market value, or serves as its main purpose to inform members about activities; and is not available to non-members through payment.

What else should be included?

Help the donor understand how their valued gift was used. We advise our clients to share more than just the donation tax language.
      • Tell the donor how the organization used their donation. What did it help the organization accomplish? How many clients did it serve? What good did you do with the gift?
      • Let donors know what goals your group accomplished and what objectives you are working towards.
      • Keep your donors engaged by letting them know about the work your organization is doing today. Invite them to participate in volunteer events. Use regular reports to share your progress through statistics that show how their money is being spent.
      • Include personal stories and quotes from staff, volunteers, or clients.

Learn More

IRS Publication 1771: Charitable Contributions – Substantiation and Disclosure Requirements

Donor Stewardship

IRS Offers Tax Tips for “The Season of Giving”

The Cullinane Law Group helps nonprofits, foundations, religious organizations, and social entrepreneurs throughout the United States who seek to create positive change.

 

 

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