Charitable deductions: are donors getting what they need?

If you're not providing all of the appropriate documentation to a donor, you might be jeopardizing their tax deductions. This will lead to very unhappy donors and could put stress on your administrative personnel at tax filing time. Also, you have new requirements, that started January 1, relating to vehicle donations.

Generally, donors can only claim a charitable contribution deduction if they have the proper documentation in their files. While it is the responsibility of donors to obtain the required substantiation, charities should have procedures in place to provide the information to donors. For donations of less than $250, the documentation can take the form of a cancelled check, receipt or any other document that shows the amount and the name of the charity. It is contributions of $250 or more that require additional documentation from you.

Contributions of money

Contributions of money (currency, checks and credit cards) are relatively simple for you to handle. If a donor gives you $250 or more at one time, you have to provide an acknowledgment. This can be in any form you wish, as long as it contains the required information.

It must indicate the amount of the donation and whether or not you provided any goods or services to the donor in exchange for the payment. If you did provide any, then you must describe the goods or services and make a good faith estimate of their value. The only timing requirement is that the donor must have it before filing his annual income tax return for that year.

Organizations have approached the acknowledgment requirement in several ways. Many send a thank you letter for each donation, and include the required language in the body of the letter or at the bottom. Others, especially those that receive multiple donations during the year, have established systems to provide an annual summary of all donations. The appropriate language is shown on the bottom of the form.

Religious organizations are allowed to ignore "intangible religious benefits" in acknowledging donations. According to the Internal Revenue Service (IRS), "An example of an intangible religious benefit is admission to a religious ceremony. The exception also includes de minimis tangible benefits, such as wine or wafer, provided in connection with a religious ceremony. The intangible religious benefit exception, however, does not apply to such items as payments for tuition for education leading to a recognized degree or for travel services or consumer goods."

If you do provide such benefits, you have to provide a statement that indicates that you did provide them. You don't have to describe the nature of the benefits provided.

Contributions of property

If you receive contributions of property in kind, all of the above rules apply. In addition, there are several other rules with which you have to comply.

First, your acknowledgment must describe the property that you received. For example, if you receive marketable securities, your acknowledgment should thank the donor for his donation "of x shares of ABC Company stock." You are not required to provide the value to the donor, and in most cases you should avoid doing so. You might not know the appropriate value to report on the donor's tax return.

Again, for a stock donation, the donor's deduction is based on the market value on the day the stock transfers from his account to yours. You will receive the sales proceeds several days later. Also, if the property is something that is harder to value, you do not have to go to the trouble of providing that value.

If the contribution has a value in excess of $5,000, and is not corporate stock or bonds, the tax law places additional requirements on the donor. First, the donor must obtain a qualified appraisal of the property donated. The appraisal must not be dated more than 60 days prior to the contribution, and must be prepared, signed and dated by a qualified appraiser.

To be a qualified appraiser, the person must hold himself out to the public as an appraiser, and his qualifications must support his expertise. Your organization should not be involved in the appraisal process, but you should let potential donors know about the requirement.

The second requirement is to obtain a signature from the donee organization (you) and provide an appraisal summary. These things are done on IRS Form 8283. Your signature is only attesting that you received the property on the appropriate date and that you will notify the IRS if you dispose of the property.

Your signature is part of a broader requirement for the donor to complete an appraisal summary. This includes your signature, as well as a signed declaration from the appraiser and a description of the property. The donor must have all of these items in hand before he files his tax return for the year of the donation. Therefore, you could be asked to respond quickly if the filing date is approaching. Note that you are not agreeing to or expressing any opinion on the valuation claimed. You are only indicating that you received the property.

If you receive a property donation worth more than $5,000, and you dispose of the item within two years, you are required to file Form 8282 with the IRS. You are also required to provide a copy to the donor. This form indicates the date you disposed of the asset and the amount you received for it. Thus, theoretically, the IRS can match the donation and the subsequent sale to test the original valuation claimed for the item.

None of the above requirements apply to marketable securities, such as stocks and bonds. Non-marketable security donations only require an appraisal if they exceed $10,000 in value. If they do, all of the requirements apply to the donation.

Vehicle donations

Prior to enactment of the American Jobs Creation Act of 2004 (the Act), vehicle donations were subject to the above rules that apply to other property. However, under the Act, vehicle donations became subject to new rules after January 1 of this year.

Effective January 1, you will have to provide your donors with a contemporaneous acknowledgment of any donations of motor vehicles, boats or planes that are worth more than $500.The timing and information will vary depending on whether you sell the vehicle shortly after receipt, you use it for charitable purposes, or you make substantial improvements prior to its sale.

If you sell the car, you must provide the donor with the acknowledgment within 30 days after sale. The acknowledgment must include the name and identifying number of the donor, the vehicle's VIN, the gross proceeds from the sale and a statement that the deductible amount may not exceed the gross proceeds. Your donor can not deduct any more than the amount you or your agent receive for selling the vehicle.

If you decide to make significant use of the vehicle for charitable purposes, or you plan to make material improvements to it, your donor's deduction will be the fair market value of the vehicle. In such case, you have to provide an acknowledgment within 30 days of the donation. The acknowledgment would include a certification of the intended use or material improvement, the intended duration of such use and a certification that the vehicle "will not be transferred in exchange for money, other property, or services before completion of such use or improvement."

There are many unanswered questions with these provisions, especially the concepts of significant use and material improvement. The Committee Reports for the Act give some examples of significant use that indicate a week is not enough and a year probably is enough. However, some guidance from the IRS on this question is needed and expected. Suppose your organization sells the vehicles to needy families for nominal payments. Is that using it in your organization's exempt purpose, or is it a sale? The Committee Report directs the IRS to issue regulations on this point. How do you provide the certifications? Suppose you give the vehicles to needy families? That will probably be acceptable, but it is unclear at this time.

The new rules will require you to send a notification to IRS when you acknowledge a vehicle donation. The actual form of that notice is unknown at the time this is written.

It is clear, however, that you will have to change your procedures if you accept vehicle donations. If you use a third party agent to handle them for you, they will have to provide you the relevant information quickly so you can comply with the new rules. It remains to be seen whether donors will make donations if they won't know the amount of their deduction for 30 days, and it will depend on your actions. They might be more likely to trade the vehicle in or sell it directly. At least in those situations they will know the tax consequences. Hopefully, most honest donors will continue to provide vehicles to support your purposes. You might feel more pressure to try to maximize the sales proceeds you receive to the extent you can. While that is difficult, making the effort might convince donors that you are the charity of choice for their donations.

Donor's costs

If a contributor incurs out-of-pocket expenses while volunteering for a charity it is still necessary for the charity to provide a written acknowledgment to the donor. One example is board members who attend organization meetings at their own expense. While the charity is not required to acknowledge or substantiate the amount spent by the volunteer, the charity is required to substantiate the fact that such volunteer activities occurred. The charity's written acknowledgment to a volunteer should contain the following elements of information.

* A complete description of the services provided to confirm the type of services performed for the charity;

* A statement to indicate whether or not the charity provided any goods or services to the volunteer;

* If any goods or services were provided by the charity, a good faith estimate of their value.

Both the old rules and the new ones impose burdens on your organization. However, it is essential that you comply and provide your donors what they need. They will not be happy with you if their tax advisors cannot prepare their tax returns because you have not provided the appropriate paperwork. If you accept vehicle donations, you need to discuss the new rules with your tax advisor to make sure the change will be as smooth as possible.

Harvey Berger, CPA, is a partner anti national director of not-for-profit tax services in Vienna, Va., for the accounting and management consulting firm Grant Thornton LLP. His email address is: [e-mail]. D. Greg Goller, CPA, is the partner-in-charge, Not-for-Profit Solutions Group, in Grant Thornton LLP's Washington, D.C, office. His email is [e-mail].