Charitable giving plays a key role in year-end tax planning for individuals and businesses. Nonprofits that are eligible to receive tax-deductible contributions should timely substantiate the donor’s tax deduction by completing the correct disclosure procedure. Upon receipt of noncash contributions, nonprofits should consider these six compliance requirements and disclose charitable contributions accordingly.
1. Provide a Donor Acknowledgement Letter
Nonprofits are required to provide a donor with a written acknowledgment to substantiate a charitable contribution of $250 or more. The letter should be sent before the donor files their income tax return and must contain the following information:
- Name of the organization.
- Date of contribution.
- Amount of cash contribution.
- Description (but not value) of noncash contribution.
- Statement that no goods or services were provided by the nonprofit, if applicable.
- Description and good faith estimate of the value of goods or services, if any, that the nonprofit provided in return for the contribution.
- Amount of contribution that is tax-deductible (applies to quid pro quo contributions greater than $75).
- Statement that goods or services, if any, that the nonprofit provided in return for the contribution consisted entirely of intangible religious benefits, if applicable.
Acknowledge letters for noncash contributions provided through Donor Advised Funds (DAFs) do not need to include language that states the donation is tax-deductible. The DAF will provide that information to the donor.
A penalty is imposed on nonprofits that do not meet the written disclosure requirement. The penalty is $10 per contribution, not to exceed $5,000 per fundraising event or mailing. A nonprofit may avoid the penalty if it can show that failure to meet the requirements was due to reasonable cause.
See IRS Publication 1771 for additional substantiation and disclosure requirements.
2. Maintain Records for IRS Form 990
Noncash contributions are reported on the Form 990, Statement of Revenue, Schedule B, Schedule of Contributors, Schedule G, Fundraising Events, and Schedule M, Noncash Contributions. To disclose these contributions correctly, nonprofits should maintain records that include the description of each contributed item and the donor’s fair market value.
For donated auction items, nonprofits should keep records of both the donor’s fair market value and the auction winner’s selling price. If the selling price is greater than the donor’s fair market value, then the difference is considered a charitable contribution to the auction winner and is reported as a contribution on the Form 990.
3. Prepare Form 1098-C for Vehicle Donations
Nonprofits that receive qualified vehicle donations with a claimed value of more than $500 are required to complete Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes. To complete the form, the nonprofit will need the vehicle’s odometer mileage, the year, make and model of the vehicle, the Vehicle Identification Number (VIN) and, if the vehicle was sold, they will need to report the gross proceeds from the sale, and the date of sale.
If the vehicle was sold in arm’s length to an unrelated party or transferred to a needy individual for significantly below fair market value, the nonprofit must furnish Copy B of the form to the donor no later than 30 days after the date it sold the vehicle.
If the vehicle was not sold or transferred, Copy B of the form must be provided to the donor by the due date of the donor’s tax return for the year of contribution. For guidance on whether the donor can deduct an unsold vehicle at fair market value, see IRS Publication 4303.
4. Prepare Form 8283 for Noncash Contributions Greater than $500
Individuals, partnerships, and corporations file Form 8283, Noncash Charitable Contributions when the sum of all noncash gifts contributed during the year exceeds $500. If the value of the donated item exceeds $5,000, the donor must get a qualified appraisal (other than money or publicly traded securities). The nonprofit recipient is not a qualified appraiser for the purpose of valuing the donated item.
On this form, nonprofits are only required to complete Part V, Donee Acknowledgement. The person acknowledging the gift must be an official authorized to sign the tax returns of the nonprofit, or a person specifically designated to sign Form 8283. The donor is required to attach Form 8283 to their tax return and provide a copy of Section B to the nonprofit.
5. Prepare Form 8282 for Noncash Contributions Sold, Exchanged or Disposed
If a nonprofit receives a noncash contribution and within 3 years sells, exchanges, or disposes of the contribution, the nonprofit must file Form 8282, Donee Information Return. However, a nonprofit is not required to file Form 8282 if:
- the property is valued at $500 or less, or
- the property is distributed for charitable purposes. For example, no reporting is required for medical supplies consumed or distributed by a tax-exempt relief organization in aiding disaster victims.
Form 8282 must be filed within 125 days after the disposition. A copy of Form 8282 must be given to the previous donor. If the nonprofit fails to file this form by the due date, fails to include all of the information required to be shown on the filed form, or includes incorrect information on the filed form, penalties may apply.
If the nonprofit did not file Form 8282 because it had no reason to believe the substantiation requirements applied to the donor, but later becomes aware that the substantiation requirements did apply, the nonprofit must file the form within 60 days after the date of awareness.
6. Create a Gift Acceptance Policy
Nonprofit organizations should also put a gift acceptance policy in place to guard against issues triggered by certain gifts. For instance, a gift acceptance policy might require a nonprofit to sell donated stock upon receipt. A policy might also require a nonprofit to reject contributions from a business that sells products considered illegal under federal law.
Generally, donors can deduct noncash charitable contributions at the contribution’s fair market value. For guidance on determining fair market value, see IRS Publication 561.
If you have questions or would like more information, please contact Chérie Williams at cwilliams@windes.com or 844.4WINDES (844.494.6337).