The Tax Cuts and Jobs Act tweaked nonprofit tax laws from multiple angles. With the focus on these large-scale changes, smaller requirements are easy to overlook.
A small-scale change that should not be missed is the IRS’s new substantiation rules requiring individuals to substantiate all donations they make to charitable organizations.
Details on the New Substantiation Requirement
IRS regulations require donors to have a bank statement or written communication from the charity verifying their donations before those donations become eligible for a deduction. When a donor makes a single donation of $250 or more, written acknowledgment from the charity is mandatory.
Nonprofits will be the ones who must administer the acknowledgment letter to their donors. When drafting these donor acknowledgment forms, nonprofits should include, at a minimum, the following information:
- Name of their organization
- Date of the contribution
- Amount of the cash contribution or descriptions of non-cash items received
- A statement that no goods or services were provided to the taxpayer in return for the donation (e.g., “No goods or services were received in return for this gift”).
The IRS also recommends that the letter specify that the nonprofit is a tax-exempt charity recognized under §501(c)(3) of the U.S. Tax Code.
Occasionally, taxpayers will make a contribution to a charity that is partly a donation and partly a payment for goods or services. Consider a taxpayer who pays $500 for a ticket to a charity dinner valued at $80. This taxpayer has made a “quid pro quo” contribution. Quid pro quo contributions valued at more than $75 must be disclosed to the donor in the form of a letter or statement. Nonprofits should provide a good-faith estimate of the value of the goods or services the donor received.
Example: “Thank you for your cash contribution of $500 that [Organization] received on June 15, 2019. In exchange for your contribution, we offered you a ticket to our fundraising gala valued at an estimated $80.”
Failure to provide these disclosure statements to donors will result in a penalty to the charitable organization of up to $10 per contribution, not to exceed $5,000 per fundraising event.
Acknowledgement Letter Best Practices
Nonprofits can draft donor acknowledgment letters in whatever manner and frequency that they please. However, these donor acknowledgment letters can be great opportunities for nonprofits to stay visible and relevant to to their donor base. A few acknowledgment letter “best practices” are to:
- Draft a template. Have standard donor acknowledgment letters at the ready, and make it easy to fill in the donor and contribution information. This will save your staff time, ensure you’ve followed all reporting guidelines, and guarantee that no donation gets forgotten.
- Be prompt. Send these letters promptly after the donation was received. This will reassure the donor that you received their contribution and let them know it was appreciated.
- Personalize it. Let your donors know how grateful you are they chose to give back to your organization. Some examples of personalization include including that taxpayer’s donation history, having your board members sign them before they are mailed, or having a staff member write a hand-written “thank you” with a personalized note to those high-dollar or regular donors.
Looking for More?
These small-scale changes may not be your top concern, but they still need to be addressed. If you want to learn more about this issue or other nonprofit concerns, please contact us.