On the Record: No Substantiation Without Representation
As donors prepare their federal income tax returns this and every year, one question looms: Can their tax-deductible gifts be substantiated?
The Internal Revenue Code has specific provisions under IRC 170 (f)(8) that govern when and how donations must be substantiated. Failure to comply with these rules could prohibit a donor from making a deduction.
While the responsibility to substantiate a charitable gift is placed on the donor, it behooves organizations to ensure that any acknowledgement meets IRC requirements so the donor can claim the gift as a deduction.
The duty to substantiate
A charitable-contribution deduction is not permitted for any gift of $250 or more unless the donor substantiates it with contemporaneous written acknowledgment by the charity. The substantiation must state:
- the amount of cash and a description of property contributed;
- whether the charity provided any goods or services in exchange for the contribution, plus a good-faith estimate of such goods or services; and
- whether the charity provided any intangible religious benefits in exchange for the contribution.
There is no required format for the contemporaneous written acknowledgment; any sort of statement will suffice as long as the requisite information is included.
An acknowledgement is considered “contemporaneous” if a donor obtains it from the charity on or before the date he files his federal income tax return — claiming the charitable deduction — or the due date, including extensions for filing the return.
When substantiation is not required
A donor is not required to substantiate charitable gifts of cash if her total gifts do not exceed $250. In those cases, she can substantiate a contribution of less than $250 by a canceled check or a written receipt of the gift from the charity — showing the organization’s name, date and amount of the contribution.
Absent a canceled check or receipt from the charity, the gift can be substantiated with other reliable written records of the contribution. However, any sort of token or thank-you gift she receives from the charity will not qualify as a receipt, but might serve as evidence of the receipt of a donation.
Furthermore, a receipt is not required if it is unreasonable to obtain one under the circumstances, such as for property dropped off at an unattended site maintained by the charity. In such a case, the organization is not obligated to provide an acknowledgement or receipt, even if it could. Rather, it is up to the donor to maintain reliable written records for each contributed item.
A series of contributions of $250 or more to the same charity in a single year can be substantiated with separate acknowledgments from the organization for each contribution or a single acknowledgement for all.
For example, if a donor makes three separate contributions of $600, $450 and $1,000 to a charity in the same year, the substantiation requirements apply to each contribution because it is more than $250. The donor can obtain a separate contemporaneous written acknowledgment for each contribution or only one on which all three contributions are reported.
On the other hand, separate contributions of less than $250 each to a single charity are not subject to substantiation requirements, regardless of whether the total contributions are $250 or more. Once substantiation rules were enacted, the IRS sought to issue anti-abuse rules to prevent avoidance of the requirements. Therefore, multiple checks of less than $250 issued by a donor on the same day to the same charity may be suspect.
Employees often make charitable contributions by way of payroll deductions. The amount withheld is treated as a separate contribution to determine if substantiation requirements apply. The same is true if a donor makes regular payments to a charity with a credit card. In both instances, if the separate donations are less than $250, the substantiation rules will not apply.
If the rules do apply, he can meet the obligation by providing proof that payments were made, such as a W-2 — in the case of gifts via payroll deduction — or a statement from the organization acknowledging the gift.
Typically, the charity receives a monetary benefit every time the donor uses his credit card. In Private Letter Ruling 9623035, the IRS addressed a variation of this plan where a company proposed to sponsor credit cards and debit cards issued through banks.
When a cardholder used the card, the retailer transferred a portion of the purchase price back to the company. The amount received from the retailer was held in a separate account, maintained on behalf of the cardholder and periodically transferred to either the cardholder or to an organization selected by the cardholder.
The IRS ruled that the substantiation rules applied to each transfer of $250 or more by the company to a charity on behalf of the cardholder. The same rules would apply to transfers of $250 or more to a charitable organization by a credit card company on behalf of an affiliated credit cardholder.
The key distinction here is not what is set aside for charity each time the affiliated credit card is used, but the payment amount that actually is made to the organization on behalf of the donor cardholder.
Thank your donors
Finally, if a taxpayer gives money to a charity in exchange for some consideration, a charitable deduction is allowable only if the donation exceeds the value of the consideration. For example, if a donor purchases a ticket to a fundraising event for $300, and the ticket entitles her to a dinner at fair-market value ($25), the value of her contribution is $275 ($300-$25), and substantiation rules will apply.
If, however, the ticket entitles the donor to dinner and dancing with a value of $75, for purposes of the substantiation rules she will not have made a contribution of $250 or more and is not required to obtain a contemporaneous written acknowledgment.
It is always the donor’s duty to substantiate charitable donations. But, considering the potential loss of a deduction for failure to comply with the rules, charities may be well advised to ensure a charitable deduction — and a happy donor — by providing the necessary acknowledgement for every donation, regardless of the amount.
Thank-you notes are always appropriate. Knowing what a donor will need to substantiate a gift for deduction purposes is an excellent way to maintain good relations with donors.
Kathleen Stephenson is of counsel with the Philadelphia office of Pepper Hamilton llp. Lisa B. Petkun is a partner in the Tax Department of Pepper Hamilton. “On the Record” keeps readers up to date on the latest tax and planning issues pertaining to fundraising endeavors and charitable organizations.