Date: July/August, 1995
(Note:Updating Necessary)

The Nonprofit Agenda
(Washington Council of Agencies)

New rules for deducting charitable contributions have gone into effect. If you don't comply with them you will lose your deductions for legitimate charitable gifts, or if you are a charity, risk fines and loss of donors.

The aim of the new rules is to prevent taxpayers from deducting payments to charitable organizations that really are for goods and services rather than donations. So much of this goes on that the government expects that the tighter rules will raise $469 million over the next five years.

For example, many churches offer day care, counseling and other services for which they charge a fee. A taxpayer might simply write a check to the church and then claim it as a charitable contribution at tax time.
Questions also arise with checks made out to private schools. They generally qualify as charitable organizations under the tax code, so donations are deductible, but payments of tuition are not. The new rules are aimed at stopping such practices.

The First Rule
As of January 1, 1994 a canceled check is not adequate proof of a gift to a charity of $250 or more. You must obtain a written acknowledgement of your donation from the charity to verify the contribution. No receipt, no deduction. So if you make a contribution of $250 or more, make sure you get the charity
to substantiate it. To be legally valid the acknowledgement must contain three items:
o The amount of any cash contribution, or in the case of non-cash contributions a description of the property.
o A statement of whether or not the donee organization provided any goods or services to the donor in return for the contribution.
o If any goods or services were provided, a description and good faith estimate of the fair market value of the goods or services (unless the goods or services are of nominal value, as defined by the IRS, or consist solely of intangible religious benefits.) Note: Even if nothing is provided in return to the donor, the IRS requires a statement noting as much. Failure to include the statement voids the statement as proof of a gift to charity.

If you make a gift of property rather than cash, the acknowledgement must include a complete description of the property. The acknowledgement does not have to value the property. The valuation is the responsibility of the donor.

Hint: If the charity does not provide the statement, submit your own acknowledgement statement of the donated property or cash, and have the charity type this description or photocopy it onto its own letterhead.

The acknowledgement must be "contemporaneous." This means the acknowledgement must be received by the earlier of two dates: the date the donor actually files their tax return for the year of the contribution and the due date (including extensions) of the return. If you don't obtain the acknowledgement until a later date-- perhaps after receiving an audit notice -- you will lose your deduction for your gift, even if it was 100% legitimate. However: The IRS has stated it will ease this requirement this year.

The acknowledgement need not be in any particular form. Letters, postcards, or computer-generated forms are acceptable. The acknowledgement does not have to include the donor's social security number or tax identification number. The acknowledgement may be provided for each contribution of $250 or more or may be provided in a periodic statement, for example, an annual summary.

For purposes, of the $250 threshold, separate contributions of less than $250 will not be aggregated. However, clearly abusive situations, such as a number of checks written on the same day, will be aggregated and subject to the rule.

The Second Rule
A second new rule applies to a "quid pro quo" contribution, in which the donor receives goods or services from the charity in exchange for a contribution. For example, in exchange for your donation or gift to a charity, you receive tickets to a dinner, a theatrical production or a major sporting event.

When a quid pro quo contribution exceeds $75, the charity must provide the donor with:
o A written estimate of the value of the goods or services it provided in return.
o Inform the donor that only the difference between this value and the donated amount is deductible.

Example: You donate $150 to a charity and in return receive two tickets to a dinner. If the tickets are worth $35 each the charity must provide you with written notice of this fact and inform you that only $80 of your donation is deductible.

Note: The $75 threshold is determined by the amount of the payment not the amount of the contribution. Thus, for example, a payment of $100 in exchange for a dinner worth $40 is a quid pro quo contribution, even though the amount of the contribution ($60) is $75 or less. Separate payments will not be aggregated for purposes of the over $75 threshold.

A charity that fails to make the required disclosure for quid pro quo donations risks fines of $10 per gift, up to a maximum of $5,000 per fundraising event. The disclosure requirement does not apply if the goods or services consist solely of either nominal value or intangible religious benefits.

Finally, the IRS in temporary regulations has provided special rules for contributions made by payroll deduction. The special rules allow taxpayers to substantiate contributions made through payroll deduction by a combination of two documents:

a) A document furnished by the taxpayer's employer that evidences the amount withheld from the taxpayer's wages, and

b) A document prepared by the donee organization that states that the organization does not provide goods or services as whole or partial consideration for any contributions made by payroll deduction.