Acknowledgment Letters: Ensuring Charitable Donations for Donors
Nonprofit organizations are always thankful for the charitable contributions they receive from donors. However, what if the nonprofit receiving the donations unintentionally causes the IRS to disallow the contributor’s tax deduction for those donations? A donor acknowledgment letter is not only a thank-you card to the donor but also a much-needed documentation of the charitable contribution for tax purposes. The tax deduction for the donor could be disallowed by the IRS if documentation requirements aren’t being met by the nonprofit. This isn’t a situation any nonprofit wants to find themself in. Below is a reminder of the requirements.
Acknowledgment Letter Requirements
As a reminder, a provision within the Coronavirus Aid, Relief, and Economic Security Act allows for an above-the-line deduction for taxpayers who don’t itemize up to $300 for cash charitable contributions to any qualifying Section 501(c)(3) public charity, excluding donor-advised funds. If donors chose to give more than $250 to one charity, this organization will be relied upon to provide an accurate and complete donor acknowledgment letter to document the tax deduction for the donor.
Donations under $250 aren’t required to follow the following substantiation rules. However, any donations above this threshold are required to have a “contemporaneous written acknowledgment of the contribution by the donee organization.”
To meet the IRS’ “contemporaneous” requirement, donors must have the acknowledgment of the donation on or before the date they file their return for the year the contribution was made. If the tax return is filed late, the acknowledgment is still required to be provided before the due date (including extensions) for filing the return.
The acknowledgment of the donation must be written, typically in a letter format to the donor. The donor can file this letter with their other tax documents to substantiate the claim that a tax-deductible contribution was made.
Content of Acknowledgment
The IRS requires several key pieces of information within the letter to substantiate the tax-deductible contribution. The letter must include the amount of cash and a description (not a value) of any property other than cash contributed.
There must be a statement included to specify whether the donee organization provided any goods or services in consideration, either entirely or in part, for any property contributed. At the time of payment to the nonprofit, if the taxpayer receives or expects to receive goods or services from the nonprofit or any other party in return for the gift, this must be included in the acknowledgment letter. The acknowledgment letter would then be required to include a description and good faith estimate of the value of the goods/services. “Goods or services” include cash, property, services, benefits, and privileges.
The burden is on the taxpayer to show that all or part of the payment is a charitable contribution. The payment isn’t considered a contribution unless the taxpayer intended to make a payment and, in fact, does make the payment in excess of the fair market value of the goods or services received.
If the goods or services received by the donor were intangible religious benefits, there should be a statement included in the letter to this effect. For example, the written acknowledgment should state, “only intangible religious benefits were provided.” Intangible religious benefits refer to a religious benefit provided by an organization organized exclusively for religious purposes.
The donee organization is required to provide the substantiation of the tax deduction for the donor. The donor can’t provide a receipt or proof from a bank statement or canceled check to prove the money was given to the nonprofit.
While the donor acknowledgment letter is relatively short and might seem to only be a way to thank the donor for their contribution, there’s so much more at stake. Each donation counts to a nonprofit organization, no matter the size of the gift. A nonprofit doesn’t want the reputation or local headlines of being the reason a donor doesn’t receive their charitable tax deduction. A happy donor is a donor who will have much more potential to contribute to the nonprofit in the future!
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