Substantiation and Disclosure Requirements for 501(c)(3) Organizations: A Primer on the Charitable Contribution Rules
January 12, 2020
Contributions made to 501(c)(3) tax-exempt organizations (referred to hereinafter as "charities") are only deductible as charitable contributions for federal income tax purposes if they are made with donative intent and to the extent that they exceed the fair market value of any goods or services received in return for the payment. Federal tax law requires charities to inform donors in writing of the value of benefits received in return for contributions over $75. The law also requires donors to obtain written substantiation of all charitable contributions of $250 or more. If a charity does not provide appropriate documentation to donors, its donors may lose the ability to deduct their contributions, and the charity may face penalties for failure to comply with the law.
Internal Revenue Service (“IRS”) guidance on these issues can be found here:
The following is a summary of the key rules in this area applicable to 501(c)(3) organizations.
Donor's Substantiation Requirements
No charitable deduction is permitted for any charitable contribution of $250 or more unless the donors has contemporaneous written substantiation from the charity. In cases where the charity has provided goods or services to the donor in exchange for making the contribution, this contemporaneous written acknowledgment must include a good faith estimate of the value of such goods or services. Thus, donors may not rely solely on a canceled check or credit card receipt, for instance, to substantiate a cash contribution of $250 or more.
The substantiation must be "contemporaneous": It must be obtained by the donor no later than the date the donor actually files a return for the tax year in which the contribution was made. If the return is filed after the due date or extended due date, then the substantiation must have been obtained by the due date or extended due date. However, the donor does not need to attach the substantiation to its tax return.
While the responsibility for obtaining this substantiation technically lies with the donor and the charity is not required to report this information to the IRS, the charity must comply in order to protect the charitable deductibility of its donors' contributions. Since the charity will not know when its donors will file their returns, it may consider providing the substantiation at the time of contribution. In any event, charities should endeavor to provide them by January 31 of the next year.
Charities may either provide separate acknowledgments for each contribution of $250 or more from a donor or may furnish periodic or even annual acknowledgments substantiating all contributions of $250 or more from a donor. Separate payments are regarded as independent contributions and are not aggregated for purposes of measuring the $250 threshold (subject to anti-abuse rules designed to prevent avoidance of the substantiation requirement by taxpayers writing separate smaller checks on the same date). If donations are made through payroll deductions, the deduction from each paycheck is regarded as a separate payment.
There is no prescribed format for the written acknowledgment. For example, email, letters or postcards are acceptable. The acknowledgment does not need to include the donor's Social Security or federal tax identification number. It must, however, provide sufficient information to substantiate the amount of the deductible contribution. The acknowledgment should note the amount of any cash contribution. However, if the donation is in the form of property, then the acknowledgment must describe, but need not value, such property. Valuation of the donated property is the responsibility of the donor. Moreover, if the value of an item or group of similar items exceeds $6,000, the donor must obtain a qualified appraisal and submit an appraisal summary with the tax return claiming the deduction.
The substantiation also must note whether the charity provided any goods or services in consideration, in whole or in part, for the contribution. If the donor received nothing in return for the contribution, the substantiation must so state. In addition, if any goods or services were provided by the charity in consideration, in whole or in part, for the contribution, then the substantiation must provide a description and good-faith estimate of the value of the goods or services. These are referred to as "quid pro quo contributions" (note that charities are required to furnish disclosure statements to donors for such quid pro quo contributions in excess of $75, as described below).
Unreimbursed Expenses of Volunteers
Unreimbursed expenses incurred while providing volunteer services to a charity are deductible as a charitable contribution. Volunteer services include unpaid service as a board member, committee member, convention delegate, researcher, etc. Volunteering expenses that may be deductible as charitable contributions include, among others, unreimbursed commuting expenses (either the actual cost of operating the vehicle for charitable work or the flat IRS-provided per mile rate; actual costs include gas, oil and repairs directly related to the use of the vehicle for charitable work, but not general repairs, depreciation or insurance; parking and tolls may be deducted in addition to the costs calculated under either of the two methods), and travel expenses (for overnight travel away from home to render charitable services, the unreimbursed costs for plane, train or similar tickets, as well as lodging and meals, are deductible; however, the trip must be authorized by the charity and can have no significant element of personal pleasure, recreation or vacation).
Note than nondeductible expenses include, among others: the value of donated services, the cost of meals not incurred while traveling or away from home overnight, expenditures made for influencing legislation, and day care expenses for your children while you volunteer. For unreimbursed expenses of $250 or more incurred by charitable volunteers in connection with the rendering of services to or on behalf of a charity, in order for such expenses to be deductible as charitable contributions by the volunteer, in addition to receipts, canceled checks, and similar records otherwise required, the volunteer must obtain a written statement from the charity. The statement must (i) describe the services rendered by the volunteer, (ii) state whether the volunteer received any goods or services in consideration, in whole or in part, for the unreimbursed expenses, and (iii) if so, provide a good-faith estimate of the value of such goods or services.
Disclosure of Receipt of Quid Pro Quo Contributions
Charities must provide a written disclosure statement to donors who make "quid pro quo contributions" in excess of $75. This requirement is separate from the written substantiation for deductibility purposes described above. In certain circumstances, a charity may be able to satisfy both requirements with the same written document.
A quid pro quo contribution is a payment made partly as a contribution and partly for goods or services provided to the donor by the charity. Where a donor pays more than fair market value to a charity for goods or services, only the amount that exceeds the value of the goods or services is deductible as a charitable contribution. For example, when a donor contributes $100 to a charity and receives a dinner ticket valued at $40, $60 would be deductible to the donor as a charitable contribution. Because the donor's quid pro quo contribution exceeds $75, the disclosure statement must be furnished, even though the deductible amount does not exceed $75.
Separate payments of $75 or less made a different times of the year for separate fundraising events will not be aggregated for purposes of the $75 threshold (subject to anti-abuse rules designed to prevent the avoidance of this disclosure requirement in situations such as the writing of multiple checks for the same transaction).
The required written disclosure statement must:
(i) inform the donor that the amount of the contribution that is deductible as a charitable contribution for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed to the charity by the donor over the value of goods and services provided by the charity to the donor; and
(ii) provide the donor with a good-faith estimate of the value of the goods or services that the donor received.
The charity must furnish the statement in connection with either the solicitation or the receipt of the quid pro quo contribution. If the disclosure statement is furnished in connection with a particular solicitation, it is not necessary for the charity to provide another statement when the associated contribution is actually received.
The disclosure must be in writing and must be made in a manner that is reasonably likely to come to the attention of the donor. For example, a disclosure in small print within a larger document might not meet this requirement.
Due to the requirement of donative intent (discussed above), if a charity conducts a fundraising event (such as a dinner, ball, show, sports event, or other benefit event), it must employ procedures to make clear that a gift is being solicited in addition to participation in the event. This can be accomplished through the solicitation materials for the event or as part of a payment receipt. The charity must indicate the amount properly attributable to the purchase of the benefits of the event and the total amount solicited. To do this, it will need to determine the value of the benefits in advance of the solicitation.
Any reasonable method may be used to estimate the fair market value of a benefit, so long as the method is applied in good faith. If the charity paid fair market value for the benefit, such as a catered meal, then that cost is the appropriate amount. If the benefits are donated to the charity, then the charity must estimate their fair market value and cannot assume the value is zero. When the event is reasonably comparable to events for which there are established charges for admission, valuation will be simple. In other cases, the charity will need to make a good-faith attempt to value the benefit. The fact that the full amount of the donor's payment may be used by the charity for its charitable activities is irrelevant and does not affect the valuation of the benefit or the amount qualifying as a charitable contribution.
In addition, the fact that a donor does not use the tickets or other privileges (provided in consideration, in whole or in part, for the payment) does not increase the amount eligible for charitable deductibility. The test of charitable deductibility is not whether the right to attend or participate was exercised but whether the right was accepted or rejected by the donor. If the donor desires to support an event but does not intend to use the tickets being offered for the event, the tickets can be declined or returned. In such event, the charity's receipt or acknowledgment (required if the payment is $250 or more) should state that no benefits were provided.
In the following circumstances, among others, the quid pro quo disclosure statement is not required (and if a written acknowledgment is otherwise required by the donor – for contributions of $250 or more – it may state that no goods or services were provided):
(i) Where the only goods or services provided to a donor are token items that meet the IRS standards for items of "insubstantial value" (e.g., goods or services with a value of less than 2% of the amount of the contribution up to a defined limit, newsletters not of commercial quality, "low-cost articles" provided for free without an advance order), such amounts which are adjusted annually for inflation;
(ii) Where there is no donative element involved in a particular transaction with a charity, such as in sales of merchandise in a gift shop; or
(iii) Where only one or both of the following membership benefits are provided in exchange for annual membership dues payments of $75 or less: (a) Free admission to members-only events with a per-person cost to the charity (excluding any allocable overhead) that is no higher than the IRS standard for "low-cost articles," or (b) rights or privileges that can be exercised frequently during the membership period (e.g., free or discounted admission to the charity's facilities or events, free or discounted parking, preferred access to or discounts on the purchase of goods or services).
Note that where the exclusion for certain membership benefits (provided in exchange for annual membership dues payments to a charity of $75 or less) is not applicable – and presuming “donative intent” exists (which may or may not be the case) – membership dues paid to a charity are only deductible as a charitable contribution to the extent that such dues exceed the value of the membership benefits received in return. In the case of membership dues (over $75 per year) paid to a 501(c)(3) professional association, for instance, the value of membership benefits may equal or exceed the amount of membership dues. The same circumstance may apply in the case of a corporate sponsorship payment made to a 501(c)(3) organization with respect to the marketing benefits received by the sponsor. In such events, the payments would not be deductible as charitable contributions for this reason – as well as for the reason that donative intent is likely lacking. However, the membership dues and corporate sponsorship payments may well be fully deductible to the member or sponsor as a business expense. The determination as to whether a payment qualifies as an ordinary and necessary business expense is wholly separate and distinct from the determination of charitable deductibility. This case-by-case determination is made by the member on an individual basis, and the professional association has no obligation to assist in the determination.
A penalty is imposed on charities that do not meet the quid pro quo disclosure requirements. For failure to make the required disclosure in connection with a quid pro quo contribution of more than $75, there is a penalty of $10 per contribution, not to exceed $5,000 per fundraising event or mailing. A charity may avoid the penalty if it can demonstrate that the failure was due to reasonable cause.
For more information contact Mr. Tenenbaum at jtenenbaum@TenenbaumLegal.com or 202-221-8002.