The holiday bells are ringing, and December’s calendar is full of events to be shared with family and friends. Many people are also in the midst of year-end tax planning, which will typically involve charitable giving. On average, more than 30% of charitable donations are made in December each year, which means it is also likely to be tax planning and compliance season for charitable organizations.
The following are a few year end tax planning and compliance tips to consider.
Tip #1 – Charitable Gift Substantiation for Happy Donors (And a Happy IRS)
For a single charitable gift of $250 or more, a donor cannot claim a tax deduction unless they obtain a contemporaneous, written acknowledgment of the contribution from the charitable organization. Although it is the donor’s responsibility to obtain the written acknowledgment, most charitable organizations choose to support their donor relationships by timely providing the written statements without request. The IRS requires the following information be obtained by the donor:
If no goods or services were provided by the organization in return for the donor’s contribution, the written acknowledgement must contain affirmation to that fact. There have been significant charitable deductions denied by the tax courts because that statement was absent in the written acknowledgement to the donor.
A question charitable organizations and donors may have regarding substantiation requirements is: “what is considered to be contemporaneous?”
The official IRS rule is a donor must have the acknowledgement on or before the earlier of 1) the date on which the donor files their return for the taxable year the contribution was made or 2) the due date, including extensions for filing such return. While many charitable organizations have a practice of providing the acknowledgement information shortly after the gift is made, a good rule of thumb for those charitable organizations not responding earlier is to have the acknowledgements sent by January 31 for the prior calendar year gifts. The January 31 date correlates with the dates 1099s and W-2s are due to payees.
We’ve got you covered on preparing your books for year end. Learn more here.
If a donor makes a non-cash contribution to a charitable organization totaling more than $5,000 (other than publicly traded securities), and the donor intends to claim a charitable deduction for their gift, the donor should be in contact with the organization to request an additional acknowledgement of the gift at the time the gift is made, or shortly thereafter.
The acknowledgement for this gift amount occurs by the charitable organization providing information on IRS Form 8283, Noncash Charitable Contributions. There are two important notes for charitable organizations regarding Form 8283. First, the organization is only required to complete Part IV; the rest of the information should be completed by the donor. Second, for tangible personal property, because of the impact on charitable deduction limits to the donor, it is important to properly answer the Part IV question, “Does the organization intend to use the property for an unrelated use?” The term “unrelated use” means a use unrelated to the exempt purpose or function of the charitable organization.
Example: If a painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and studied by art students, the use isn't an unrelated use. However, if the painting is sold and the proceeds are used by the organization for educational purposes, the use is an unrelated use and the question in Part IV would be marked as “yes.”
Before a donor submits page 2 of Form 8283 to the charitable organization for signature, the donor should have completed at least the donor’s name, identifying number, and a description of the donated property (Section B, Part I, line 5, column (a)). If tangible property was donated, the donor should have described its physical condition (line 5, column (b)) at the time of the gift. And finally, Section B, Part II, if applicable, should have also been completed by the donor. Having this information provided on Form 8283 prior to the organization’s signature ensures the organization is acknowledging an accurate non-cash contribution.
The charitable deduction will be denied for a non-cash gift of $5,000 or more unless the donor obtains a qualified written appraisal of the donated property. If that information is not made available to the charitable organization, the donor should be advised of the deduction denial without it being done.
For the organization, the person acknowledging the gift must be an official authorized to sign tax returns of the organization, or a person the organization has specifically designated to sign Form 8283. The organization should also retain a copy of Section B of the Form 8283—donors are required to provide a copy.
Leaving the cost basis line blank on a charitable contribution deduction disclosure form once cost a taxpayer their tax deduction. Read about the case here.
Tip #2 – No Charitable Deduction Can Still be a Good Thing
Qualified IRA charitable distributions, also referred to as IRA charitable rollovers, continue to grow in popularity. While the donor is not able to claim a charitable deduction for a qualified charitable distribution (QCD), the distribution is generally nontaxable to the donor for federal income tax purposes (state rules may vary). As a result, these can be especially attractive gifts for donors who want to manage their taxable income and their annual minimum distribution requirement, or for those who don’t itemize their income tax deductions.
A qualified charitable distribution is made directly by the trustee of a donor’s IRA to an organization eligible to receive tax-deductible contributions. It is important to note there are certain types of 501(c)(3) organizations that are not eligible to receive QCDs. If an organization is unsure whether it is eligible to receive a QCD, the donor should consult with their tax advisor. The donor must be at least age 70½ when the distribution is made and the maximum annual exclusion for the sum of QCDs made to one or more charities in a calendar year is limited to $100,000 per person. And, as noted above, QCDs can be counted toward satisfying a donor’s required minimum distributions (RMDs) for the year, as long as the rules are met.
Finally, even though the donor cannot claim a charitable deduction for a QCD, they must obtain the same type of charitable acknowledgment they would need if they were claiming a charitable deduction. It is vital that the donor receive no benefit in exchange for a gift made via a QCD. Failure to comply with this requirement would disallow the entire amount of the QCD. Therefore, the acknowledgement to the donor should appropriately indicate that no goods or services were provided to the donor in connection with the gift.
Tip #3 – Convene the Team
Working with donors who have sophisticated planned and philanthropic giving goals can be a daunting task for some development teams, as many charitable organizations do not have CPAs or tax attorneys on their development team staff. A great best practice is to encourage collaboration between the organization’s team, the donor, the donor’s tax advisor and possibly other legal, tax or financial advisors, depending on the complexity of the gift.
Even for relatively simple noncash gifts, having the donor’s tax advisor involved during the planning process will help ensure the substantiation requirements are understood and met, qualified appraisals are obtained, as needed, and unpleasant surprises are avoided when the donor has their tax return prepared. For example, if a donor inadvertently gifted securities held one year or less rather than more than one year, the result could be an entirely different tax consequence than the donor was anticipating, which is not good for the donor, or the charitable organization receiving the gift.
Tip #4 – Good Things May Come to Those Who Wait
Continue to nurture the relationships with your donors for future giving. It is estimated that over 90% of charitable donations, by number of gifts, are made in the form of cash. Fundraisers ask for cash gifts because they are the simplest to administer, there is little risk, and immediate operational or capital campaign needs are satisfied.
However, in the United States, only a small percent of wealth is held in a form that is accessible simply by writing a check. Publicly traded securities, which are easy to gift, are one of the most common noncash assets donated to charitable organizations.
Other forms of wealth are capable of being gifted, but are less accessible and involve complex estate and income tax planning by the donor. There may be legal barriers or negative tax consequences involved. An organization’s uncertainty or unfamiliarity with noncash gifts can lead to lost opportunities for both the donor and the charitable organization. But, when the right situation arises for a donor, tremendous financial benefit can be provided to both the donor and the charitable organization anticipating the gift, if appropriate planning is developed.
Noncash assets that can have significant value and some of the charitable tools used to transfer this wealth include:
|Closely-Held Business Interests||Split or Partial Interest Gifts|
|Other Assets||Other Assets (cont.)|
Mark your calendars for Thursday, March 26, 2020, 11 a.m. – 12 p.m. Central, for the March installment of Eide Bailly’s Nonprofit Webinar Series, during which we will be discussing many of the noncash assets and opportunities for planned giving that are identified above.
Year-end doesn’t have to be stressful. Click here for a toolbox of resources to help you keep everything in order.