Nonprofits and their donors now face fewer administrative requirements around charitable contributions, thanks to new rules issued by the IRS in late July 2018. These final regulations provide guidance as to how cash and noncash charitable contributions must be reported and substantiated under Section 170 of the Internal Revenue Code.
This new approach is a departure from previous practice in several key ways, which are outlined below for organizations and individuals ahead of the traditional year-end giving season.
Administrative burden lessened for charities
Previously, charities would issue a letter of confirmation to donors for every contribution received, regardless of dollar amount. The reason for this practice was the lack of clarity in IRS rules around substantiation, so organizations used these letters to prove donations (as did the donors).
In its July update, the IRS clarified that $250 is the lowest amount for which an organization must send a written confirmation (which can take the form of a letter or an email). Under that threshold, organizations are no longer required to send written confirmation. The IRS also clarified substantiation guidelines for contributions made by payroll deduction, providing two options: a pay stub, Form W-2 or other employer-furnished document that sets forth the amount withheld or a pledge card or other document prepared by the donee that shows the name of the donee is now acceptable
Deposit receipts must still be kept on file at the charity for all contributions, regardless of amount, but this new approach reduces a costly and time-consuming obligation for organizations.
New noncash record-keeping for donors
The IRS guidance also clarifies what exact records donors should keep for different values of noncash contributions. The new rules require that “contemporaneous written acknowledgement” must include the amount of cash donated and a description of any noncash property donations and a statement as to whether the donee organization provided any goods or services in consideration of the donation. If this is the case, the acknowledgment must also include a description and good faith estimate of the value of the received goods or services.
Donors should follow the below guidelines when obtaining confirmation of noncash contributions from the donee. In the case of routine contributions of similar items throughout the taxable year, donors may aggregate the value of the contributions and treat it as one property donation for the purposes of determining the threshold level.
- Less than $250: Receipt from donee OR “reliable records,” which according to the IRS must contain the donee’s name and address, the contribution date, a detailed description of the property, the property’s fair market value at the time of donation, the method used to determine fair market value and, where applicable, the condition of the item.
- $250 to $500: “Contemporaneous written acknowledgement” from donee, which should be obtained no later than the date of the donor’s tax return filing and should state whether or not the donor received any goods or services in exchange for the donation. If they did, a good faith estimate of the value must also be included in the written acknowledgement.
- $500 to $5,000: Contemporaneous written acknowledgement and completed Page 1, Section A of Form 8283, “Noncash Charitable Contributions” to be filed with the taxpayer’s return.
- $5,000 and above: Contemporaneous written acknowledgement, completed Page 2, Section B of Form 8283 and a qualified appraisal. The new regulations also require that appraisals must be attached to the return for the contribution year and also attached to returns for any carryover years. Failure to do so could trigger additional scrutiny or audit of tax returns. Certain noncash donations like securities and vehicles are excluded from the appraisal requirement.
No more blank donation or pledge forms
The IRS states that blank forms filled out by the donor are no longer acceptable forms of substantiation. These forms are often used by thrift shops or other drop and go charity locations. Instead, taxpayers must procure a form completely filled out by the donee.
Charitable-minded individuals and businesses should familiarize themselves with the new documentation and reporting requirements now, rather than wait until tax filing season when the paper trail may fall short. Nonprofits may also consider educating their donor base on the new procedures. Contact your RKL advisor with any questions on how to substantiate donations made or received.
