Donations: A Nonprofit’s Roles and Responsibilities
The majority of donors do not contribute to an organization solely because they will receive a tax deduction. However, it is an important fact to include in fundraising materials. Even though the majority of individual (approximately 65%) do not itemize their taxes and therefore do not technically apply tax deductions, many donors want to know if their gift is tax deductible. It is important for nonprofit organizations to know which types of donations may not be tax deductible as well as how to receipt different types of gifts.
This resource looks at donations from two different perspectives: the organization’s and the individual’s. It outlines the types of donations that nonprofit organizations receive, the organization’s internal and external responsibilities for each type of donation, as well as the criteria for individuals to determine whether a donation is tax deductible or not and if so, the value of the donation. Examples of both cash and in-kind donations are also provided.
Different Types of Donations
There are two types of donations: cash and in-kind (non-cash) donations. While cash gifts in the form of a check, credit card, or cash are by far the most popular type of gift, over the last few years donors have increasingly decided to give in-kind donations instead of or in addition to cash donations. An in-kind donation is essentially any non-cash item given to a nonprofit that is to be used for the benefit of the nonprofit. These can include items such as computers or books; professional services skills such as legal, accounting, or plumbing work; property such as real estate or inventory; and financial assets such as stocks or bonds.
Responsibilities of the Organization When Receiving Donations
Charitable deductions are claimed by donors on their individual tax returns (IRS Form 1040), if they choose to itemize their deductions. Thus, it is up to the donor and his or her tax advisor to determine the value of the deductions, when to deduct it, and in what manner.
The nonprofit must make sure that it complies with all substantiation and documentation requirements for the donations it receives. As a result, there are both external and internal steps to be taken after receiving an in-kind donation
- Cash: The IRS mandates that anyone who makes a donation of $250 or more to a nonprofit must be provided with a receipt from the nonprofit that indicates that no gifts or services were received in exchange for the donation. A sample receipt is provided at the end of this paper. This receipt should be issued within 72 hours of the organization’s receipt of the gift so that the donor knows that their contribution has been received and acknowledged. It is good practice to receipt any individual who makes a cash contribution regardless of the amount.
- In-kind: To maintain the relationship with the donor and to fulfill IRS obligations to donors, a thank you letter should be sent as soon as possible (see sample).When a charity receives an in-kind donation, the charity should never include a value of the in-kind item received in the thank you letter since the donor is responsible for obtaining a proper valuation for in-kind contributions. If the IRS later disagrees with the amount of the charitable deduction taken by the donor, the donor must support the amount.
- Note: As with cash donations, the thank you letter must include the standard IRS language, which states in effect, “No goods or services were received in exchange for this donation.” For example, if a donor drops off a bag of clothes at a housing shelter, they cannot receive anything in exchange for this donation, such as a meal or item of clothing.
- Stock: A donor wishing to make a donation of stock must transfer the stock directly to the charitable donation, which is typically done through a broker. When the organization receives notification that stock has been received in their account, they must provide the donor with a receipt that indicates the day on which the stock was received in their account (which is often 2-3 days after the donor initiated the transfer) and the high and low price at which the stock traded that day. The organization does not provide a cash value of the stock other than listing the high/low prices per share. There are many sites where you can look up the historical high/low stock prices. One of them is: http://www.investopedia.com/markets/. Enter the company’s symbol, and then click on the “history” tab of the company’s stock prices.
- Professional Services: A volunteer for your organization can typically deduct any out-of-pocket expenses incurred during their volunteer activities with a charitable organization as well as mileage incurred for charitable purposes. It is up to the individual to substantiate any and all documentation for volunteer-related deductions.
- Individuals who donate their time or services, even if they are professionals, are not allowed to deduct the value of this time. (Please see IRS publication 526 for more information). http://www.irs.gov/publications/p526/ar02.html#en_US_2012_publink1000229698. A receipt should always be provided for donations, both cash and in-kind. While a receipt may not always be necessary, they are often essential to donors for records and also provide an efficient way to thank donors for their contributions.
- Special Events: When an organization sells tickets for an event or hosts a charitable auction, it is important to remember the IRS regulations on “quid pro quo,” which essentially means that no goods or services are provided in exchange for a donation. From a practical standpoint, this means that the organization must deduct the value of a dinner or gift from the total amount of the ticket price in order to provide the value of the charitable donation to the donor.
- For example, if your organization is selling tickets to a dinner for $100, and the actual cost of the meal is $50, then you must issue a receipt indicating that the donor provided a check for $100, of which $50 is a charitable donation. If your event also includes a gift bag valued at $25, then the charitable donation drops to $25 out of the total $100 donation.
- If you sponsor an auction, the donor can only count the amount that is over the actual value of the item as a charitable donation. For example, if someone purchases a one-week vacation at a timeshare that is valued at $1,000, and they pay $750 for it, then they do not receive any charitable deduction, as what they are receiving (one week at a timeshare) is valued at more than what they paid. If the donor paid $1,500 for the same timeshare, then the $500 that is over the actual value of the items can be tax deductible.
- Cash: Record the donation in the organization’s donor database as well as in the appropriate accounting system. Ensure that donations that were raised for a designated cause or program are properly recorded and tracked in the accounting system.
- In-kind: Determine a value of the donated item(s) for internal use. Many organizations rely on donations of food, clothing, and even space in order to run. If you did not receive these donations, particularly those critical to your program, you would have to purchase them.
- It is important to count the value of in-kind donations as revenue in your program. Donations should be recorded as support and are included in the revenue and support section of the activity statement. They should be recorded at their Fair Market Value (FMV) at the time of the donation. When they are used, they should be treated as expenses and recorded as such. For example, if you receive office space for free, and it is valued at $100/month or $1,200/year, you will list this as a revenue line as well as an expense line in your annual budget. Funders, particular foundations, and major donors will want to see that you are utilizing a variety of resources, including in-kind donations.
Is the Donation Tax Deductible for the Donor?
Many people assume that any gift they give to a nonprofit will be tax deductible. But not all charitable contributions actually are tax deductible. Several factors go in to deciding whether a gift is tax deductible including: who the donation was given to, when it was given, the purpose, the giver’s tax situation, and regulation by the IRS. Each donor’s situation is unique. Therefore, the nonprofit should never give specific legal or tax advice. Doing so may make the organization liable if its counsel is incorrect.
Recently, the IRS instituted greater regulation on donations. The new regulations require that both nonprofits and donors provide more documentation and detail in tax filings than before. The new rules also limit the amount that some donors may deduct in some cases.
While each donor’s situation is unique, there are some gifts that are not deductible. These include:
- Donations to political parties, campaigns, or political action committees (PAC).
- Donations to individuals.
- Fees or dues paid as part of professional organizations.
- Donations to labor unions, chambers of commerce, or business associations.
- Donations to entities that are often nonprofit but have individually classified themselves as for-profit, such as for-profit schools or for-profit hospitals.
- Gifts, donations, fines, or penalties paid to foreign, local, or state governments.
- The value of your time for services rendered to a nonprofit.
Valuing In-Kind Donations
When valuing cash donations, the value of the gift is the value of the cash, dollar to dollar. However, often gifts-in-kind are much more difficult to value. Generally, gifts-in-kind are valued at Fair Market Value (FMV) which is the price that the item would sell for on the open market. This is not always easy to find; therefore, some of the most common donations have generally accepted values from a few sources. While these guidelines are accurate, you should always consult your tax advisor, CPA, and IRS publications before valuing gifts-in-kind. Some companies value items independent of the IRS. These valuation types include:
- Common household goods and clothing – The Salvation Army provides a suggested guide to valuing commonly donated household items and clothing. Keep in mind that prices vary based on condition as well as geographic location of the organization. The guide can be found on The Salvation Army’s website here.
- Cars – The IRS heavily regulates the donation of cars; donors are encouraged to review the IRS publication on this so that they fully understand how they can value their donation. If your donation falls under the exception category, The Kelley Blue Book is often used to value a used car.
Example of an In-Kind Receipt
There are two parts to the receipt, the introductory/thank you and the receipt.
[City State ZIP]
Dear [Donor Name],
On behalf of the students, staff and board of [Charity], we would like to extend our deepest gratitude for your recent in-kind donations, listed below.
Your thoughtfulness is greatly appreciated by everyone here at [Charity]. Your contribution goes directly towards our ability to [mission of charity]. Just this year alone, we have provided [what the charity does – educate children, provide shelter to the homeless, feed the hungry].
Once again, thank you for your interest in and commitment to [Charity] as we serve [target population].
[Signature of CEO or Executive Director]
[Email and/or Phone Number]
[Name of Charity here] is a 501(c)(3) nonprofit organization. Your contribution is tax deductible to the extent allowed by law. No goods or services were provided in exchange for your generous donation.
Donated Items [examples below]:
- Books, with a variety of titles, some for children, some religious and some for seniors.
- Other items, such as a clock and bottles of lotion.
Resources and Articles for Further Reading
- “Tax Information for Charitable Organizations.” Internal Revenue Service. http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations
- Fishman, J.D., Stephen. Every Nonprofit's Tax Guide: How to Keep Your Tax-Exempt Status and Avoid IRS Problems. Nolo, Third Edition: November 2013. http://www.amazon.com/Every-Nonprofits-Tax-Guide-Tax-Exempt/dp/1413319297
- “Tax Information for Contributors.” Internal Revenue Service. http://www.irs.gov/Charities-&-Non-Profits/Contributors
In-Kind Donation Valuation Guides
- The Salvation Army: commonly donated household goods and clothing. http://www.use.salvationarmy.org/use/www_usn20.nsf/vw-text-dynamic-arrays/33CE09196410A2148825770B0054FF7A?openDocument&charset=utf-8
- IRS Publication 561: Determining the Value of Donated Property (Rev. April 2007). http://www.irs.gov/pub/irs-pdf/p561.pdf
- IRS Publication 4304: A Donor’s Guide to Car Donations (Rev. August 2013). http://www.irs.gov/pub/irs-pdf/p4303.pdf
- IRS Publication 4302: A Charity’s Guide to Vehicle Donations (Rev. February 2009). http://www.irs.gov/pub/irs-tege/pub4303.pdf
- The Kelley Blue Book. http://www.kbb.com/whats-my-car-worth/
For more information, please visit the Giersch Group at http://www.gierschgroup.com/ or contact us at firstname.lastname@example.org