As the end of the year approaches, many individuals and businesses will be planning their holiday and year-end giving. Charitable donations are an excellent way for donors to reduce their tax burdens while also supporting their communities and nonprofit organizations. Donors commonly have questions about the timing of contributions to ensure they receive a deduction for their charitable donation in the appropriate year. In addition, charities must provide the date that a contribution was received when providing acknowledgements to their donors. These rules are complicated, so care needs to be taken in evaluating these year-end donations.
Charitable contributions are deductible in the year the donation is made. A contribution is considered to be made on the date of delivery to the charity if the donor has irrevocably parted with ownership (possession and control) of the property. The date of delivery rules vary depending on the type of property contributed and how it is transmitted to the charity. Below are some of the most common donation scenarios, along with the rules pertaining to each type of donation.
Contributions Paid by a Credit Card
Contributions made using credit cards are deductible as a charitable contribution in the year the charge is made (i.e. when the bank pays the charity). This is true even if the credit card bill isn’t paid off until the following year.
Contributions Made by Check
Under the “mailbox rule”, the date of mailing to the charity of a donation sent by U.S. Postal Service is deemed the date of the contribution if there are no restrictions on the time or manner of payment and the check is honored when presented. (Treasury Regulation 1.170A-1(b)). The “mailbox rule” does not apply to items sent by private delivery service (e.g. FedEx or UPS). Items sent by private delivery service are deemed delivered on the day they arrive at the charity’s office. Postdated checks and checks that bounce are not covered by the “mailbox rule”. A postdated check is not an immediately payable contribution, but is a promise to pay on a future date. In addition, if a check is dishonored for insufficient funds, the donation will not be deemed to have been made when it was mailed or delivered.
Contributions Made by Electronic Transfers
The Code and Regulations do not specifically address this method of payment. However, applying the general principles, the delivery date is the day the transfer to the charity’s account is completed.
The delivery date of a donation made by text is the day the donor sends the text message, if charged to the donor’s telephone or wireless account.
For federal tax purposes, pledges are deductible in the year they are fulfilled, not in the year they are made.
Contributions of Securities
A contribution of stock or bonds is completed when the donor unconditionally relinquishes control of the security to the charity or its agent and can no longer revoke authorization to transfer the security. The delivery date depends on how and to whom delivery is made. Delivery must be unconditional and the stock certificate must be properly endorsed. If the stock certificate is not endorsed, the donor should give the charity a properly endorsed stock power with the stock certificate.
Hand delivered: When the stock certificate itself is hand delivered to the charity, the contribution of stock is effective on the date of delivery of a properly endorsed stock certificate to the charity.
Donor mailed: For securities that are mailed by the donor, best practice is to mail the stock certificate and a fully executed stock power separately by certified mail since the endorsed stock certificate is a negotiable instrument. The date of the donation is the date both documents are mailed or the date of the last mailing if mailed at different times.
Broker or other agent mailed: If the donor delivers or mails the stock certificate to his or her own broker/agent or to the issuing corporation for transfer to the charity, the contribution of the stock is not effective until the stock is transferred on the corporation’s books. The actual issuance of a new certificate or the transfer on the corporation’s books could potentially take weeks. The donor’s deduction is based on the value of the stock on the date the transfer is deemed to occur rather than on the day he or she instructs their agent to make the transfer. This could potentially affect the timing of the deduction as well as cause issues with the value of the donor’s contribution in a volatile stock market. To avoid these issues, organizations should suggest the donor deliver the stock certificate and a properly executed stock power directly to the charity or its agent.
Contributions of Real Property
The delivery date for a donation of real property is generally effective when the charity receives a properly executed deed. However, if the deed must be recorded to effectuate title under local law, the delivery date is the date of recording.
Other Noncash Contributions
Donations of household items, clothing, etc. are deductible in the year the items are delivered to the charity.
Different types of charitable gifts have different requirements when it comes down to determining the date a contribution was actually made. Understanding the timing of charitable donations will help bolster donor relations as well as maximize the donation’s tax benefit to the donor. Keep these timing rules in mind as you plan your final fundraising push before the new year.