One of the requirements for claiming a tax deduction for a contribution to a charitable organization is that you have to be able to prove it. The rationale is clear, but the rules for compliance are very detailed and the cost of running afoul of them can be substantial. For example, in a case from 2017, the Tax Court disallowed a $33 million deduction when the donor neglected to include the necessary records with the donor’s tax return. In a case from 2016, the Tax Court disallowed a $65 million deduction because the donor failed to obtain an acknowledgment of the gift from the charity.
To a large degree, the burden of complying with the rules lies with the donor, and it is certainly the donor who bears the most risk if the substantiation requirements are not met. However, an organization that receives charitable contributions has its own set of requirements and can be subject to significant penalties if those requirements are not met.
As a starting point, a donor who intends to claim a tax deduction for a charitable contribution must first make sure that the organization is eligible to receive charitable contributions. Most eligible organizations are listed in the Tax Exempt Organization Search, available at www.irs.gov, but not all eligible organizations are listed and, in those cases, the donor should request a copy of the organization’s IRS exemption letter. As a reminder, just because an organization is exempt from the requirement of paying income tax does not mean that contributions to that organization result in a tax deduction for the donor. For example, contributions to civic leagues, social clubs, labor unions, homeowners associations, political groups, and candidates for public office are not tax deductible.
Generally speaking, the record-keeping requirements for substantiating a charitable contribution vary depending first and foremost on whether the gift was cash or other property, and thereafter on the amount of the gift and whether any goods or services or other benefits were received in exchange for the contribution. As noted above, the donor bears the burden of complying with the substantiation rules, but the charitable organization may have an obligation to provide the donor with adequate evidence that the contribution took place. Even in those cases where the charitable organization does not have a legal obligation to provide the donor with a gift acknowledgment, doing so is considered a best practice that can engender goodwill with donors.
Cash contributions include those paid by cash, check, debit or credit card, payroll deduction, or other electronic funds transfer. The critical rule for all cash contributions is that no deduction will be allowed unless the donor keeps one or more of the following items:
- Bank record. A qualifying bank record includes a canceled check or a bank or credit card statement that clearly lists the name of the charitable organization and the date and amount of the contribution.
- Contribution receipt. If the donor relies on a receipt from the charitable organization, it must list the name of the charity and the date and amount of the contribution.
- Payroll deduction records. A qualifying payroll deduction record must include a pay stub, W-2, or other employer-provided document that shows the date and amount of the contribution. In addition, the donor must retain a pledge card or similar document prepared by or for the charitable organization that lists the name of the charity.
A special rule applies to cash contributions of $250 or more: No deduction will be allowed unless the donor obtains a contemporaneous written acknowledgement of the contribution from the charitable organization. The acknowledgement must include the amount of the contribution and a statement that no goods or services were provided in exchange for the contribution. However, if the donor did receive some benefit in exchange for the contribution, the acknowledgement must include a good faith estimate of the value of that benefit. If the only benefit received is an intangible religious benefit, the acknowledgement must state so. In order to be considered contemporaneous, the donor must obtain the acknowledgement on or before the earlier of the date the donor files his or her tax return or the due date for filing the return, including extensions. It is not permissible to file your tax return and then, after the deduction is questioned by the IRS, request an acknowledgement from the charitable organization.
If a contribution of $250 or more is made via payroll deduction, the donor must retain the payroll deduction records noted above in number 3, but the pledge card must also state that no goods or services were provided in exchange for the contribution. In addition, the date of the contribution must be apparent from the employer-provided payroll record or on the pledge card provided by the charity.
It is important to note that for purposes of determining whether a contribution is $250 or more, including for payroll deductions, separate contributions are not aggregated to reach this amount. In other words, making a $25 contribution each month to your church would not trigger the special rule requiring a contemporaneous written acknowledgement, even though the total contribution amount exceeded $250.
For contributions of property other than cash, the record-keeping requirements vary depending on whether the deduction is more or less than certain thresholds: $250, $500, and $5,000. For a contribution of property for which you claim a deduction of less than $250, you must obtain a receipt or letter from the charitable organization that includes (1) the name and address of the charity; (2) the date of the contribution; and (3) a reasonably detailed description of the property. If a security is contributed, the receipt must state the name of the issuer, the type of security, and whether the security is publicly traded. If it is not feasible to obtain a receipt, as in the case where property is left at a charity’s unattended drop site, the donor may instead satisfy the record-keeping requirement by maintaining “reliable written records” for each item of contributed property. Such records include the name and address of the charity, the date of the contribution, the fair market value of the property, and the method used to determine the value. Note that a deduction for a contribution of clothing or household items will only be permitted if the items are in “good used condition” or better at the time of the contribution.
As was the case for cash contributions of $250 or more, if a donor makes a non-cash contribution of at least $250 but not more than $500, a deduction will only be allowed if the donor obtains a contemporaneous written acknowledgement from the charitable organization. The acknowledgement must include the same items noted above for cash contributions, except that instead of stating the amount of cash contributed, it must include a description of the property contributed (but not necessarily its value).
If a donor claims a deduction for a charitable contribution of property with a value of over $500 but not more than $5,000, the donor must keep reliable written records of the contribution and obtain a contemporaneous written acknowledgement from the charitable organization, as described above. In addition, the donor must prepare Part A of IRS Form 8283 and file this with the donor’s tax return. Information that must be included on the form includes (1) the manner in which the property was acquired (e.g., purchase, gift, inheritance, exchange); (2) the acquisition date of the property; (3) the basis of the property; (4) the fair market value of the property; and (5) the method for determining the fair market value.
Finally, if a donor claims a deduction of more than $5,000 for a non-cash contribution to a charitable organization, all of the requirements described above for the lower deduction thresholds must be met. In addition, however, the donor generally must obtain a qualified appraisal of the donated property and must prepare Part B of IRS Form 8283 and file this with the donor’s tax return. Part B of Form 8283 requires similar information to that noted above for Part A, but also requires a signed declaration by the qualified appraiser and the signature of an authorized representative of the charitable organization. In the event the deduction exceeds $500,000, the qualified appraisal itself must also be attached to the tax return. When considering whether a deduction exceeds $5,000, it is necessary to combine deductions for all similar items, even if they were not contributed to the same charitable organization. The term “similar items” refers to property that fits into the same generic category, such as jewelry, land, furniture, paintings, books, etc.
Contributions From Which You Benefit
If a donor contributes cash or other property to a charitable organization and receives a benefit in exchange for that contribution, the donor is permitted to deduct only that amount by which the contribution exceeds the value of the benefits received. In order to facilitate calculation of this amount, the charity must provide the donor with a written disclosure for any “quid pro quo” contribution that exceeds $75. The disclosure (1) must inform the donor that the donor’s deduction is limited to the excess of the contribution over the value of the benefit received in return, and (2) must also provide a good faith estimate of the value of the goods or services that the donor received in exchange for the contribution. For example, if a donor gives a charity $100 and receives in exchange a ticket to a dinner gala valued at $60, the charity must provide a disclosure statement and the donor’s resulting deduction will be limited to $40.
The charity has two opportunities to furnish the disclosure statement. It may be provided when the charity solicits quid pro quo contributions, or it may be provided in the form of a receipt for a quid pro quo contribution. Note that the charity’s requirement to provide a written disclosure is triggered not by the amount of the charitable deduction but by the total amount paid to the charity. However, there are certain exceptions to the general rule. For example, if the benefits received by the donor in exchange for the contribution are deemed to be insubstantial, the disclosure is not required. Likewise, if there is no donative intent, the charity need not provide the disclosure (e.g., where a purchase is made at a museum gift shop).
If a charitable organization fails to provide the required disclosure in connection with a quid pro quo contribution, it can be liable for a penalty of $10 per contribution, up to a maximum of $5,000 per solicitation or fundraising or event. However, the charity can avoid the penalty if it can show that the failure to provide the disclosure was due to reasonable cause.
The rules governing the substantiation requirements for claiming a charitable deduction are complicated and require patience to analyze exactly which rule applies for the type and value of property contributed. This article summarizes only the most common types of contributions and recordkeeping requirements. Other rules apply to conservation easements, vehicle donations, contributions of appreciated property, and deducting expenses relating to volunteering, to name a few. In addition, the law continues to evolve. Several of the provisions described above originate in legislation that was passed in 2004 and 2006, but certain Treasury Regulations implementing those provisions were only recently finalized and are effective for contributions made on or after July 30, 2018.
DISCLAIMER: The foregoing does not constitute legal advice and has been prepared for informational purposes only. Please contact us directly with questions about how these and other laws and procedures relate to your specific situation.
Prepared by GKH attorney Doug Smith. Attorney Smith practices in the areas of Estate Planning and Administration, Business Succession Planning, Nonprofit Organization, Corporate and Commercial Law, and Tax Law.