Being a self-proclaimed “Tax Geek” is a bit like being a 3-year-old: I don’t just follow the law, I have to ask, “Why?” That has certainly come in handy when digesting and understanding the myriad of regulations enforced by our friends at the IRS. And just to be clear, your beef should not be solely directed at the IRS. Congress makes up the laws, the IRS is the agency charged with implementation and enforcement.
So back to the “Why?” Often IRS rules seem silly or punitive or both. But not if you take Nancy’s Toddler Approach to Tax Law and ask, “Why?” For example, a few months ago, this newspaper published a Letter to the Editor that caught my eye. It was written by an esteemed colleague and fellow CPA. She had learned of a recent court case that disallowed a tax deduction for a charitable contribution because the donor did not have a “contemporaneous written acknowledgement,” or CWA. To most of us, that is called “a thank you letter.”
My colleague wanted to give our community a heads-up: For every contribution you make, you must have a written acknowledgement from that charitable organization. In fact, for contributions of $250 or more, your canceled check will not suffice – you must have a CWA in order to claim the deduction. At first glance, you may be perplexed by this requirement but when you understand its purpose, it makes perfect sense.
In 2006, Congress passed the Pension and Protection Act of 2006. Sweeping reforms were made with respect to tax-exempt organizations in an attempt to curb abuses by taxpayers. There are recordkeeping and substantiation rules imposed on donors of charitable contributions and disclosure rules imposed on charities that receive certain quid pro quo contributions:
• A donor must have a bank record or written communication from a charity for any monetary contribution before the donor can claim a charitable contribution on his/her federal income tax return.
• A donor is responsible for obtaining a contemporaneous written acknowledgment (CWA) from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return.
• A charitable organization is required to provide a written disclosure to a donor who receives goods or services in exchange for a single payment in excess of $75.
• A donee organization must state in the CWA whether goods or services have been given or received in exchange for said contribution.
You can see that the IRS has placed responsibility on both the donor and the donee organization to properly report charitable contributions. Seems crazy? Not really. I call this the “Golf-Outing Rule.” The federal government loses millions every year from improperly prepared tax returns. One area of concern is the deduction allowed for a charitable contribution as it pertains to fundraising events. This is your golf outing, dinner dance, silent-auction purchase, or any other creative avenue of fundraising activity conducted by an exempt organization. These are quid pro quo contributions: part purchase, part contribution.
Many taxpayers want to claim a deduction for the total ticket price for the event; however, the allowable deduction is the difference between the consideration given and the value of goods and services received. Plain and simple, the purchase (i.e. round of golf, dinner, et. al.) is not an allowable deduction.
So now it all makes sense. You may call it crazy, but I call it genius – the federal government has essentially “deputized” tax-exempt organizations and tax preparers as enforcers of the Golf-Outing Rule. Whether you are an individual, organization, or a tax return preparer, take notice: You will probably be affected by the 3 G’s of Charitable Contributions – Golf, Giving and Gratitude.
• Nancy Gonsiorek is a Certified Public Accountant providing audit, tax and consulting services to nonprofit organizations. Her firm, Nancy L. Gonsiorek, CPA, LLC is based in Crystal Lake. She can be reached at 815-455-9462 or via email at NancyGonsiorek@comcast.net.