Charitable contributions are a vital part of running any nonprofit. As important as they are, they can also be a source of frustration with their complex tax regulations or rules. The goal is to make the process as simple and clear-cut as possible for both the donor and the organization to ensure that you’ll have an easy audit when the time comes. Proper planning can go a long way in helping you prepare for accepting charitable contributions from your donors.
The following are a few 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 states 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.
If a donor makes a non-cash contribution totaling more than $5,000 (other than publicly traded securities) to a charitable organization, 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.
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 that the deduction will be denied if the appraisal is not done.
For the organization, the person acknowledging the gift must be either 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.
Do not leave the cost basis line blank on a charitable contribution deduction disclosure form. This can cost a taxpayer their tax deduction.
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. Additionally, 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 those held 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 can be 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.
There’s much to consider about estate and gift tax exemptions.
Some noncash assets that can have significant value and the charitable tools used to transfer this wealth include:
|Closely-Held Business Interests||Split or Partial Interest Gifts|
|• C corporation stock
• S corporation stock
• Limited partnerships
• LLC interests
• Charitable gift annuities
• Charitable remainder trusts
• Charitable lead trusts
• Life estates
|Other Assets||Other Assets (cont.)|
• Real estate
• Tangible business property
• Tangible personal property (art, collectibles, vehicles)
• Life insurance
• Bargain sales
• Retirement assets (beneficiary designation)
Tip #5: Be Sure to Adhere to State and Local Tax Guidance
The U.S. Department of Treasury and the IRS have regulations that address charitable contributions in exchange for state and local tax credits. Certain provisions affect the federal deductibility of charitable contributions where the contribution is tied to receiving a state or local tax credit.
Under current regulations, taxpayers who make payments or transfer property to an entity eligible to receive tax deductible contributions must reduce their charitable contribution deduction by the amount of any state or local tax credit the taxpayers receive or expect to receive.
For example, if a state grants a 70% state tax credit and the taxpayer pays $1,000 to an eligible charity, the taxpayer must reduce the $1,000 charitable contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The regulations also apply to payments made by trusts or estates in determining the amount of their charitable contribution deduction.
An exception is the 15% de minimis. If the state credit received for making a charitable contribution is not more than 15% of the amount contributed, then there is no requirement to make the reduction in the charitable contribution amount. This exception was retained in the finalizing of the regulations.
A safe harbor provides some relief, “in certain circumstances,” to itemizing taxpayers who have:
Understanding the Impact of Charitable Contributions
It can be hard to keep up with the latest rules and regulations. Knowing how to properly comply with items related to charitable contributions and giving (for both the nonprofit and their donors) will be key.
Charitable contributions are key to the well-being of many nonprofits. Make sure you have the right steps in place.
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