Contribution reporting for nonprofits is one of the most complex areas of tax law. I receive more questions with respect to contributions than any other single topic relating to nonprofits. Since it is November and the year is winding down, it is time to talk about contributions as they relate to a most revered stakeholder in any public charity: the donor. This information is important for nonprofit leaders and the donors who support them.
Reporting responsibility of the organization: You are required by law to report to your donors, before the due date of their individual income tax returns, cash contributions of $250 or more, and in-kind contributions of $75 or more for the year. You must include in your acknowledgement information regarding whether or not goods or services were given or received in exchange for a contribution. What donors need to know is that they must have that written acknowledgement to claim their deduction – a cancelled check is not acceptable documentation and there have been several court cases where the contribution deduction was disallowed for this reason.
When is a contribution not a contribution? The first is the “Qualified Sponsorship Payment,” or QSP. Often businesses provide support and receive in return an insubstantial benefit, such as a business card ad. This type of support is generally considered contribution revenue for the organization; however, the donor business is provided a business rather than charitable deduction for its support. This is a tax benefit for small businesses because the business deduction provides more favorable tax treatment than the charitable deduction.
A second example is the “trust funds” set up at a bank for the benefit of an individual or family in need. While a donor must inquire regarding the specifics, these funds are typically not a charitable organization and your contribution is not a tax-deductible contribution; rather, it is a gift and is subject to the gift tax rules. For more on gift taxes, see the excellent article written last week by my colleague and fellow Northwest Herald columnist, Mike Flood.
Lastly, donors should know this general rule: a contribution that benefits a specific individual or family is not tax-deductible when donor knows who the recipient is.
What else is deductible? In-kind contributions of property are tax-deductible. If the donated property is valued at $5,000 or more, it must be accompanied by a certified appraisal. Both the organization and the donor have documentation requirements for such contributions.
A volunteer for a charitable organization may incur out-of-pocket expenses that may be deductible on his individual income tax return. The organization must be a qualified charitable organization and proper documentation of expenses maintained.
• Miles driven for charity work may be deductible at 14 cents per mile;
• You may be able to deduct unreimbursed travel expenses, such as train, plane, lodging and meals;
• There must be no significant element of personal pleasure, recreation or vacation but the deduction will qualify even if you enjoy the trip; and
• Your work must be real and substantial throughout the entire trip.
Some last reminders: Nonprofit leaders need to take care not to provide tax advice. I often counsel clients on the proper wording of their contribution acknowledgements. It is important to avoid a statement of fact, such as, “your contribution is tax deductible.” A better wording choice is, “Your contribution is deductible to the extent allowed by law. Please consult your tax advisor.”
These are just a few simple tips to navigate end of year reporting requirements. As always, please consult your tax advisor for additional guidance.
• 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 firstname.lastname@example.org.