Substantiation Rules Are Not Meant to be Broken

Posted by Lou Volpe, CPA

Substantiation Rules - Nonprofit CPA FirmThe holiday season has passed and it is now tax-filing season. During this time, charitable organizations need to make sure that they are doing everything in their power to assist their donors in following the IRS donation “substantiation rules.” Winter is already a cold and dark time of the year, so if charitable organizations doe not assist donors in following these substantiation rules, they could be leaving them out in the pitch black with frostbite. By following these substantiation rules, charitable organizations will not only provide the proof that their donors need to deduct financial gifts, but having proper documentation will also help their donors avoid any further problems with the IRS.

There are various substantiation rules and recordkeeping requirements that need to be met from both the donor and the charitable organization in order for a donor’s charitable contribution to be eligible for deduction on his income tax return.  A donor cannot claim a deduction for any monetary gift or for any unreimbursed out-of-pocket expenses related to giving services to a qualified organization unless the donor maintains adequate records of the contribution/out-of-pocket expenses in the form of either a bank record (i.e., cancelled check or credit card receipt) or a contemporaneous dated written acknowledgement from the charitable organization (i.e. receipt or letter).  For the dated written acknowledgement to be considered contemporaneous with the contribution, a donor must receive it from the charitable organization by the earlier of:  the date on which the donor actually files their income tax return for the year of the contribution; or the due date (including extensions) of the return.  One thing is for certain.  If these rules and requirements are not met, no deduction will be allowed.

When a donor makes a charitable contribution under $250, a cancelled check or credit card receipt is usually sufficient substantiation. When a donor makes cash or noncash contributions of $250 or more, the donor is required to obtain a contemporaneous dated written acknowledgement of the contribution from the recipient charitable organization.  Although the responsibility to obtain this dated written acknowledgment falls at the feet of the donor, the charitable organization can assist a donor by providing a timely written statement containing the following information:  1) name of the charitable organization, 2) amount of the cash contribution and description (but not the value) of a noncash contribution (separately itemized if one receipt is used to acknowledge two or more contributions), 3) date of the contribution, and 4) either a statement that no goods or services were provided by the organization in return for the contribution, or a description and good faith estimate of the value of goods or services that the organization provided in return for the contribution. If a religious organization provides only intangible religious benefits to a donor, the dated written acknowledgement does not need to describe or value those benefits.  It only needs to state that the religious organization provided the benefits.

If a donor receives goods or services in exchange for a single donation in excess of $75, the charitable organization must provide a contemporaneous dated written disclosure statement to the donor.  The required dated written disclosure statement must inform the donor that the amount of their contribution that is deductible for federal tax purposes is limited to the excess of money contributed over the value of goods and services provided by the organization.  The dated written disclosure must also provide the donor with a description and good faith estimate of the fair market value of the goods or services.

In addition, insubstantial goods or services a charitable organization provides in exchange for contributions do not have to be described in the dated written acknowledgement.  Goods and services are considered to be insubstantial if the payment occurs in the context of a fundraising campaign in which a charitable organization informs the donor of the amount of the contribution that is deductible and: the fair market value of the benefits received does not exceed the lesser of 2 percent of the payment of $104 (for 2014), or the payment is at least $52 (for 2014); the only items provided bear the charitable organization’s name or logo (i.e., calendars, mugs, or posters); and the cost of these items is within the limit for “low-cost articles,” which is $10.40 (for 2014).

When a donor makes a noncash contribution the donor is required to attach a completed Form 8283 to their tax return. Section A of Form 8283 should be completed by the donor to report donations of property in which the donor is claiming a deduction of $5,000 or less per item or group of similar items. Section A should also be completed by the donor to report donations of publicly traded securities. Section B of Form 8283 should be completed by the donor to report donations of property in which the donor is claiming a deduction of more than $5,000 per item or group of similar items. A written appraisal from a qualified appraiser is normally necessary before completing Section B of Form 8283; however, exceptions do apply. Those exceptions can be found in the IRS’s Instructions for Form 8283 along with other important information concerning appraisal requirements and when the appraisal must be attached to the return.

In determining whether the deduction for a group of similar items is more than $5,000, the donor should consider all items in the group, even if items in the group were donated to more than one charitable organization. However, a donor must file a separate Form 8283, Section B, for each charitable organization. Similar items of property are items of the same generic category or type, such as coin collections, paintings, books, clothing, jewelry, nonpublicly traded stock, land, or buildings.

Charitable organizations can assist their donors in meeting these substantiation rules by implementing certain best practices. These practices include providing dated written acknowledgement letters to all donors who contribute to the organization regardless of the amount contributed and verifying that the donor has obtained an appraisal, if necessary, before accepting a significant noncash contribution.

By working together to follow these substantiation rules, both donors and charitable organizations will be able to enjoy the many benefits that can be obtained.  Donors will be able to claim a charitable contribution on their income tax returns without having to worry about any future issues with the IRS during this already stressful time of the year.  And charitable organizations will be able to maintain a strong foundation with their donors and may even attract new donors to their cause due to their diligence in making sure that their donors’ charitable contributions are acknowledged and properly documented.

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