TEN SERIOUS PROBLEMS TO AVOID FOR YEAR-END GIFT RECEIPTS
By H. Robert Showers, Esq.
(SS Quarterly 2017 – 4th Quarter)
Near the end of any calendar year, donors and members will once again be searching for added ways to give while hoping to get the most tax benefits associated with charitable gifts. However, it may be your nonprofit/church’s job to help them achieve both desires! With the potential changes in the new tax bill before Congress, this could be especially true this year with threats of eliminating charitable deductions. Here is an article published with permission by Michael Martin, Esq. of ECFA along with a few of our additions that may prove helpful.
As we near the end of 2017, givers will once again be looking for ways to be generous while maximizing their tax benefits associated with charitable giving. It’s now your church’s job to help them achieve both goals!
Part of your important role will be to ensure that gift receipts provided by the church meet the requirements of federal tax law for those who will use the receipts as substantiation when filing their returns and claiming a charitable deduction. (We’ll use the more general term “gift receipt” in this article for what the tax code refers to as a “contemporaneous written acknowledgment”—what a mouthful!)
A few of the requirements for gift receipts are pretty intuitive, but others are not. And no matter if you consider yourself a gift receipting novice or expert, now is a great time to review your gift receipt templates and be sure they meet the appropriate guidelines.
Not to mention, the IRS and courts have historically taken a very strict approach to enforcing the gift receipting rules, in some cases, denying tax deductions to the tune of tens of thousands of dollars for not complying with the letter of the law.
As you prepare your church’s year-end receipts, avoid these seven “sins” that can spell death to your givers’ tax deductions:
- Failing to receipt the right kinds of gifts (single contributions of $250 or more). The first and most obvious sin to avoid is failing to provide givers with a proper receipt when one is needed. When is that the case, you ask? Tax law sets the bar at single contributions of $250 or more. Gifts below that amount do not require a receipt unless they are gifts of currency (bills and coins), which have no other form of substantiation.One annual summary of all gifts made throughout the year is sufficient so long as it lists the gifts by date and amount, making contributions of $250 or more identifiable within the total. Keep in mind that the $250 threshold applies to both monetary gifts and non-monetary gifts (i.e., property).
- Receipting the wrong kinds of gifts (time and rent-free use of property). Churches are often blessed by those who generously give their time or use of their property to the church. While these gifts are often extremely valuable, they cannot be claimed by the giver as deductible contributions for tax purposes. Churches should never provide receipts to givers for their time or use of their property, but they may provide a letter at year-end thanking volunteers for their time and/or use of property and advising that unreimbursed out-of-pocket expenses related to their volunteer service may be deductible.
- Receipting the wrong person (a taxpayer other than the giver). Churches are sometimes asked to provide a gift receipt in the name of someone other than the giver. To avoid being complicit in tax fraud, it is generally only appropriate to issue a gift receipt to the taxpayer remitting the funds or property.
- Missing the correct IRS wording (“no goods or services…”). Here’s a kicker. Even if your church provides a receipt for the right kinds of gifts and to the right person, it still must have some very specific information and wording to be sufficient for substantiation purposes.Be sure your gift receipts are in writing and include the following:
- Your church’s name and the giver’s name
- The date the donation was made and a date the receipt was issued
- The amount of cash or description of the property contributed
- A statement explaining whether the church provided any goods or services to the giver in exchange for the contribution.
It is that final technical requirement that has tripped up some well-meaning churches and nonprofits and cost givers significant losses in tax deductions.
5. Forgetting to disclose when givers benefit (“quid pro quo”). That brings us to the fifth deadly sin. If indeed the giver receives something of value from the church when making their contribution (e.g., a book, resource, meal, etc.), only the portion of the gift exceeding the fair market value of the benefit received may be deductible. Churches must provide a receipt for all transactions where the giver makes a payment to the church of more than $75 and receives goods or services in return (other than intangible religious benefits or items of token value). Here is a sample receipt for a quid pro quo donation:
Received from: [Donor Name]
Cash received: $300.00
Received on [Date]
In return for your gift described above, we provided you with a study Bible with an estimated value of $30.00.
[Note: Insert the description of goods and/or services provided in exchange for the gift.]
The deductible portion of your contribution for federal income tax purposes is limited to the excess of your contribution over the value of goods and services we provided to you. The $30.00 value of benefits you received must be subtracted from your cash contribution to determine your net charitable contribution.
[Note: For receipting purposes, it is not required to actually subtract the benefit from the cash gift, although it is a good approach for clear communication with donors.]
This document is necessary for claiming any available federal income tax deduction for your contribution. Please retain it for your records.
Receipt issued on: [Date]
Receipt issued by: [Name of Treasurer or Other Official]
[Name of Church]
[Address Line 1]
6. Estimating the value of non-monetary gifts for givers (becoming an appraiser). For monetary gifts (e.g., currency, check, credit card), the church should simply include the dollar amount on the giver’s receipt. When it comes to non-monetary gifts of property (sometimes also called “noncash gifts”), the church should only provide a legal description of the property and not the amount.A tension often surrounds a significant gift of property because the giver may request that the church value the gift, even documenting an excessively high value on the receipt. However, it is wise for the church to remain impartial in the matter and simply acknowledge the property by description and condition without valuing it.
7. Timing (missing the right window). They say “timing is everything,” and that is certainly true in the context of gift receipts. The law requires that receipts not only include all of the proper elements described above, but also that they be provided to the giver in a timely manner (“contemporaneously”).The timing rules vary depending on the type of gift involved, but the basic point to remember is the giver will need the receipt for substantiation purposes no later than the due date, plus any extension, of their federal income tax return, or the date the return is filed, whichever date is earlier. Don’t expect mercy if the receipt is provided to the giver at a later date, even on an amended return.
Although these rules may seem tedious, it is important for us to avoid these seven deadly sins in helping our givers receive the maximum tax benefit for their generosity.
Unlike God, the taxman and courts are not so forgiving.
For more resources on this topic and others, for a limited-time, get a FREE download of the eBook Charitable Giving Guide for Acknowledging and Reporting Cash Charitable Gifts when you join ECFA’s free resource community, ChurchEXCEL.org.
Some other serious problems that you should avoid in year-end gift receipts are as follows:
- Occasionally a church/nonprofit will accept designated or restricted gifts. Designated gifts are clear recommendations on how to use the money and enforceable more by public relations, restricted gifts have legal import since they must be adhered to. Thus, written restricted gifts carry prohibitions to use of the money except for the restricted purposes. A board can pass a resolution as a prohibition against accepting designated and/or restricted gifts, it is not conclusive. The impact of this type of policy depends on the understanding between the giver and the church/nonprofit. The mere fact the church/nonprofit has a policy not to accept a restricted gift does not supersede the giver’s gift restriction unless the church’s policy is clearly communicated to givers. A “Yes” answer to the all of following questions would be helpful to support a church’s policy on prohibiting restricted gifts:
a. Do all appeals for gifts (from the pulpit, in written solicitations, etc.) clearly and explicitly express the church’s policy that it will not accept any restricted gifts?
b. Are offering envelopes and other gift response communications devoid of any option to restrict gifts for missions, buildings, etc.?
c. Are charitable gift receipts absent of any indication of restriction limitations?
If the church/nonprofit receives a gift with a giver restriction, they should offer to refund it unless the giver agrees to remove the gift restriction?
It is generally difficult to adequately communicate a “no-restricted-gifts” policy to all donors. Additionally, the nonprofit/ church’s communication is simply part of the equation; a giver’s intent relates both to what is communicated in an appeal and to any giver instructions accompanying the gift. On balance, churches/nonprofits are better served to proactively approve restricted projects to which givers can contribute and not accept other restricted gifts. Some churches include provisions in their governing documents or board resolutions indicating the church retains the right to modify conditions on the use of assets (sometimes called “variance powers”). Such powers should be clearly communicated to givers.
- Churches/nonprofits often make year- end gifts to employees to show appreciation for their dedicated service and do not withhold taxes. These payments may take several forms and have important implications to the ministry, staff members, and donors:
- Gifts made by an individual directly to a church/nonprofit staff member with no involvement by the church/nonprofit. When a giver makes a payment directly to a church/nonprofit staff member, this is a gift which is not tax-deductible to the giver and is taxable or nontaxable to the recipient—based on whether the donor’s intent was to compensate the recipient for services. A gift of this nature does not generally raise any tax issues for the church.
- Gifts made by an individual to the church/nonprofit but earmarked by the donor for a particular staff member and the gifts are not intended for use by the church/nonprofit. If contributions are earmarked by the donor for a particular individual and not intended for use by the church, they are not tax-deductible as charitable gifts. This level of gift earmarking by donors suggests that the church lacks the discretion to use the funds to carry out its functions and purposes. The use of terminology such as a “love gift for an individual” or a “desire to bless an individual” does not change the non-deductibility of such a gift.
- Gifts to church/nonprofit staff members from ministry funds. Often gifts are made from ministerial funds which are not required by contract or a typical employment plan. The gifts may be given in appreciation near year end, holiday, a birthday, or an employee anniversary. The gifts may be given in relation to personal medical or financial crises.
Gifts to staff members from ministry funds are taxable and subject to payroll tax treatment and reporting unless they meet one of the following exceptions:
- De minimis These gifts are impracticable of specific valuation, and are generally less than $25 in value. IRS rulings have emphasized that the difficulty in valuing a de minimis gift is just as important as the small value. Cash, gift cards, or other cash equivalents are not de minimis gifts, regardless of how small the value.
- Employee achievement awards. To avoid taxation, achievement awards must meet specific tax law requirements. The law generally requires a written, nondiscriminatory achievement award program, which provides awards either upon attaining longevity goals or safety standards and meets other requirements for gift type and amount limits.
. Gifts to “bless” a particular staff member by raising a “love offering.” If a church/nonprofit preauthorizes a love offering or other special offering, the gifts made may be deductible as charitable contributions. Adequate discretion and control over the donations are key factors in determining deductibility. The payment of the love offering or other special offering is reportable and taxable and subject to payroll tax treatment and reporting unless one of the exceptions noted above is met.
. Gifts to an educational institution to pay tuition for a staff member’s dependent. There is no charitable tax deduction for a gift to a church/nonprofit that is designated for the educational expenses of a staff member’s dependent. If the church uses the funds to pay the tuition of a staff member’s dependent, even if the funds are paid directly to the educational institution, the amount is taxable and subject to payroll tax treatment and reporting with respect to the staff member.
- Benevolence gifts that are earmarked to specific persons are not tax deductible. Establish policies for benevolence gifts. Giver intent is a key factor with gifts for benevolence purposes. If a giver intends for a gift to benefit a specific individual instead of supporting the ministry of the organization, gifts are generally not deductible and should not be accepted by ministries.
Although year-end gift receipts are critical, these comments above may seem overwhelming. However, it is important for us to avoid these deadly problems in helping our donors receive the maximum tax benefit for their generosity and not get our Church/nonprofit in serious legal and tax trouble. As Michael wrote in his ECFA article above: “Unlike God, the IRS and courts are not so forgiving.”
Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers, LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact H. Robert Showers, Esq. at firstname.lastname@example.org or Justin R. Coleman, Esq. at email@example.com for legal advice that will meet your specific needs.