Posted by Jonathan D. Moll, CPA
The academic year is coming to an end for many of the nonprofit independent and parochial schools across the nation. Business offices at those schools are making the final push to collect outstanding tuition payments before their families break for the summer and, in some cases, make their re-enrollment decisions. As we know, situations arise during the year that may affect a family’s ability to meet their expected tuition obligation. It is not uncommon for schools that have a mission or philosophy that is rich in helping those in need and supporting the local community to have a benevolence fund established for providing tuition assistance to their families in need. However, the deductibility as a charitable donation for a contribution to that fund might not be as straightforward as you think.
Tax Deductibility Scholarship Contributions
There are three items of tax literature that indicate deductibility of a payment into the scholarship and tuition fund as a charitable contribution ultimately comes down to who determines the award recipient.
- If the qualifying nonprofit school makes the selection of the award recipient, payments into the fund are considered a deductible charitable contribution. This is supported by Rev Rul 68-484, 1968-2 CB 105.
- If the donor makes the decision as to the specific individual(s) that will benefit from the award, the payments to the fund are not considered charitable donations. In Tripp, Chester v. Com., (1964, CA7) 14 AFTR 2d 5810, 337 F2d 432, 64-2 USTC, payments described by a taxpayer as scholarship grants were made to a qualifying school but earmarked for a specific person. These payments were not considered to be deductible charitable contributions. In Rev Rul 79-81, 1979-1 CB 107, payments to an exempt education institution that were earmarked for a particular student’s use and in an amount approximating the cost of their education were not considered to be deductible charitable contributions.
What do nonprofit schools need to do? Primarily, schools that are receiving donations for the benefit of specific students should make sure their acknowledgment of the payment does not imply it is a deductible charitable contribution. Further, for schools with documented gift acceptance policies, I would recommend the policies include wording to further document a school’s position that payments received for the benefit of specific individuals are not considered deductible charitable contributions by the school. As always, if any confusion exists, consult your CPA.