New Substantiation Requirements of Charitable Contributions
Not-For-Profit Advisor, 2007 Summer

Almost every charitable organization receives contributions in furtherance of its exempt purpose. Some of the provisions related to charitable contributions and the reporting responsibilities of charitable organizations have been changed with the Pension Protection Act of 2006. For example, beginning January 1, 2007, every cash donation must be substantiated by a bank record or receipt. There is no longer a de minimis rule related to substantiation of cash donations less than $250.

The rules related to the substantiation of charitable contributions can be complex depending on the amount or value of the contribution, type of property contributed, and its intended and ultimate use by the organization. This article provides an overview of the substantiation requirements for both the donor and the organization.

Cash Contributions

Less Than $250

Cash contributions are deductible only if the donor maintains either a bank record or a written acknowledgement from the donee showing the organization’s name and the date and amount of the contribution.

$250 or More

Organizations receiving contributions of $250 or more are required to provide the donor with a timely, written acknowledgement containing the following:

• Name of the organization
• Date and amount of contribution
• Statement that no goods or services were provided by the organization in return for the contribution, if that was the case
• Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
• Statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case

Special exceptions apply for providing token gifts and membership benefits in exchange for contributions.

It’s not necessary to include the donor’s Social Security or tax identification numbers on the acknowledgment, nor is it necessary to include the donee’s employer identification number.

Payroll Deductions

When a donor makes contributions by payroll deduction, the donor may use both of the following documents as the written acknowledgment obtained from the organization:

• A pay stub, Form W-2, Wage and Tax Statement, or other documents furnished by the employer that documents the amount withheld by the employer and paid to the organization
• A pledge card that includes a statement to the effect that the organization does not provide goods or services in consideration for contributions to the organization by payroll deduction
  

Property Contributions

Less than $250

Donors contributing property valued less than $250 are required to substantiate the contribution with a written receipt from the organization containing the following information:

• Name of the organization
• Date and location of the contribution
• Description on the property (The value of the property need not be stated on the receipt.)

In addition, the donor is required to maintain records documenting the following:

• The value of the property as of the contribution date
• The method used to determine the value

No deduction is allowed for contributions of clothing or household goods unless they are in good condition or better.

Additional rules apply for donors contributing inventory or property used in a trade or business.

From $250 to $500

The requirements by the organization to provide timely, written acknowledgement are the same as for cash contributions greater than $250. The acknowledgement should include a description of the property donated, but need not include the value of the property.

Greater than $500 to $5,000

The organization is required to provide timely, written acknowledgement as outlined above.

The donor is required to complete Federal Form 8283, Noncash Charitable Contributions, to file with their tax returns. The donor must also provide:

• The manner in which the property was acquired and the approximate date
• The adjusted basis for property other than publicly traded securities

If the acquisition date or adjusted basis is not known, a statement of explanation should be attached to the tax return.

Greater than $5,000

Organizations are required to provide timely, written acknowledgements as outlined above.

For property other than publicly traded stock, the donor is required to obtain a qualified appraisal. The donor must also complete an appraisal summary on Form 8283, and the summary must be signed by the organization and the qualified appraiser.

Contributions of privately held securities and artwork are subject to special rules.

If the property is appreciated property and the organization disposes of the property within three years of the contribution, the donor’s deduction is limited to the basis in the property unless the organization provides certification that the property was intended to be used or was, in fact, used for the organization’s exempt purpose. The organization must file Form 8282, Donee Information Return, with both the IRS and the donor within 125 days of the disposition certifying the exempt use. If the organization disposes of the property within the three-year period and fails to file Form 8282, the donor must recapture income in the amount of the excess of the fair market value at the time of the contribution over the donor’s basis in the property.

Taxidermy Property

When the contribution of taxidermic property is made by the person who prepared or paid for the preparation of the property, the deduction is limited to the lesser of the donor’s basis or fair market value. The donor’s basis includes only the costs of preparing, stuffing, or mounting the property and does not include indirect costs of travel or hunting expenses. The acknowledgement required by the organization depends on the fair market value of the property as outlined above.

Contributions of Motor Vehicles, Boats, and Airplanes Valued at Greater than $500

Contributions of motor vehicles for use on streets and highways, boats, and airplanes are subject to special provisions. In certain circumstances, the charitable deduction is limited to the gross proceeds from the sale of the vehicle.

In addition, the donor is required to file Federal Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, as well as Form 8283 with his or her tax return.

These rules do not apply to vehicles donated by a dealer out of its inventory.

The organization is required to provide timely, written acknowledgement of the donation via Form 1098-C. The acknowledgement must include:

• Name and tax identification number of the donor
• Vehicle identification number or similar number
• Date of the contribution

Additional documentation depends on the organization’s intent and use of the vehicle.

Sale Without Significant Use or Improvement

If the organization sells the vehicle without any significant use or improvement, it must provide an additional acknowledgement within 30 days of the sale. The acknowledgement must include:

• Certification that the vehicle was sold in an arm’s-length transaction between unrelated parties
• Gross proceeds of the sale
• Date of the sale
• A statement that the amount deductible by the donor may not exceed the gross proceeds

The charitable deduction for the donor is limited to the fair market value at the time of the contribution or the gross proceeds of the vehicle, whichever is less.

Sale Below Fair Market Value to Needy Individuals

If in furtherance of its charitable purpose, the organization sells or intends to sell the vehicle to a needy individual at a price significantly below the fair market value, the organization is required to provide additional acknowledgement within 30 days of the date of the contribution. The acknowledgement must include a statement certifying that the organization sold or intends to sell the vehicle to a needy individual at a price significantly below fair market value and that the sale will be in direct furtherance of the organization’s charitable purpose of aiding the poor, distressed, or underprivileged who need transportation.

Significant Intervening Use or Material Improvement Prior to the Sale

If the organization intends to use the vehicle for its charitable purpose or intends to make material improvements to the vehicle, the organization must provide an acknowledgement within 30 days of the contribution. The acknowledgement must include:

• A statement detailing the intended intervening use, including the intended duration, or the intended material improvement
• A certification that the vehicle will not be transferred in exchange for money, property, or services before completion of the intended use or improvement

If the fair market value of the vehicle exceeds $5,000, the donor is required to obtain a qualified appraisal. The donor must also complete an appraisal summary on Form 8283 and the summary must be signed by the organization and the qualified appraiser.

General Rules Related to Acknowledgements of Cash Contributions

A separate acknowledgment may be provided for each single contribution, or one acknowledgment, such as an annual summary showing the date and amount of each contribution, may be used. There are no IRS forms for the acknowledgment. Letters postcards, or computer-generated forms with the above information are acceptable. An organization can provide either a paper copy of the acknowledgment to the donor, or an organization can provide the acknowledgment electronically, such as via an e-mail addressed to the donor. A donor should not attach the acknowledgment to his or her individual income tax return, but must retain it to substantiate the contribution.

Unreimbursed Expenses

If a donor makes a single contribution of $250 or more in the form of unreimbursed expenses, e.g., out-of-pocket transportation expenses incurred in order to perform donated services for an organization, then the donor must obtain a written acknowledgment from the organization containing:

• A description of the services provided by the donor
• A statement of whether or not the organization provided goods or services in return for the contribution
• A description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
• A statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits (described earlier in this publication), if that was the case

In addition, a donor must maintain adequate records of the unreimbursed expenses.

Example of an Unreimbursed Expense

A chosen representative going to an annual convention of a charitable organization purchases an airline ticket to travel to the convention. The organization does not reimburse the delegate for the $500 ticket. The representative should keep a record of the expenditure, such as a copy of the ticket. The representative should obtain from the organization a description of the services that the representative provided and a statement that the representative received no goods or services from the organization.

Quid Pro Quo Contributions

A donor may only take a contribution deduction to the extent that his or her contribution exceeds the fair market value of the goods or services the donor receives in return for the contribution; therefore, donors need to know the value of the goods or services. An organization must provide a written disclosure statement to a donor who makes a payment exceeding $75 partly as a contribution and partly for goods and services provided by the organization. The contribution made by a donor in exchange for goods or services is known as a quid pro quo contribution.

Example of a Quid Pro Quo Contribution

A donor gives a charitable organization $100 in exchange for a concert ticket with a fair market value of $40. In this example, the donor’s tax deduction may not exceed $60. Because the donor’s payment (quid pro quo contribution) exceeds $75, the charitable organization must furnish a disclosure statement to the donor, even though the deductible amount does not exceed $75.

A required written disclosure statement must:

• Inform a donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money (and the fair market value of property other than money) contributed by the donor over the value of goods or services provided by the organization
• Provide a donor with a good faith estimate of the fair market value of the goods or services

An organization must furnish a disclosure statement in connection with either the solicitation or the receipt of the quid pro quo contribution. The statement must be in writing and must be made in a manner that is 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.

Exception

A written disclosure statement is not required:

• Where the goods or services given to a donor meet the token, “the “membership benefits,” or the “intangible religious benefits” exception described earlier
• Where there is no donative element involved in a particular transaction, such as in a typical museum gift shop sale

Penalty

A penalty is imposed on charities that do not meet the written disclosure requirement. The penalty is $10 per contribution, not to exceed $5,000 per fundraising event or mailing. An organization may avoid the penalty if it can show that failure to meet the requirements was due to reasonable cause.