This time of year often finds us attending fundraisers or donating our household items from spring cleaning to a charitable organization, which often raises questions about charitable contributions, acknowledgements and tax deductions. The Internal Revenue Service has compiled some tips that you should keep in mind when contributing to charity.
In order to be deductible, charitable contributions must be made to qualified organizations. Approximately 275,000 organizations automatically lost their tax-exempt status recently because they did not file required annual reports for three consecutive years. These organizations are no longer eligible to receive deductible contributions.
Generally, you can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.
Keep good records of any contribution you make, regardless of the amount. For any cash contribution, you must maintain a record, such as a cancelled check, bank or credit card statement, payroll deduction record or a written statement from the charity containing the date and amount of the contribution as well as the name of the organization.
Only contributions actually made during the tax year are deductible. For example, if you pledge $500 in September but only pay the charity $200 by Dec. 31, your deduction for the current year is $200.
Include credit card charges and payments by check in the year you give them to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.
If your contribution is $250 or more, you must have a written acknowledgment from the organization. The acknowledgment must include the cash amount, and state whether the organization provided any goods or services in exchange for the gift (including an estimate of the value of those goods or services).
If you donate property, the acknowledgment must include a description of the items. If you claim a deduction for a contribution of noncash property worth more than $5,000, generally an appraisal must be obtained, and Section B of Form 8283 must be completed and filed with your return. It is the donor’s responsibility to estimate the value of the property donated to the charitable organization.
Donors who purchase items at a charity auction may claim a charitable contribution deduction for the excess of the purchase price paid for an item over its fair market value.
An organization may use any reasonable method to estimate the fair market value (FMV) of goods or services it provided to a donor, as long as it applies the method in good faith. The organization may estimate the FMV of goods or services that generally are not commercially available by using the FMV of similar or comparable goods or services. Goods or services may be similar or comparable even if they do not have the unique qualities of the goods or services being valued.
In addition, donors who provide goods for charities to sell at an auction often ask the charity if the donor is entitled to claim a fair market value charitable deduction for a contribution of appreciated property to the charity that will later be sold. Under these circumstances, the law limits a donor’s charitable deduction to the donor’s tax basis in the contributed property and does not permit the donor to claim a fair market value charitable deduction for the contribution.
If your organization accepts contributions, providing timely acknowledgements with all necessary information helps your donors to have the supporting documentation for their donations. Specific guidelines apply to the form and language of the acknowledgement when goods or services are exchanged.
Whether you are the donor or the recipient charitable organization, we can assist you in understanding the requirements for documenting charitable contributions. Please call us if you have any questions in this area.